Saturday, March 29, 2014

29/3/2014: Russia's Competitiveness Challenge & What Needs to be Done...

In Russia, state sectors (non-market services) are the main drag on competitiveness. The chart below shows the gap between real wages & productivity growth by sectors, y-o-y growth. Higher values imply that wages are growing faster than productivity.

So three things to note:

  1. Non-market) services drive decline in competitiveness (wages growth in education health, public services, civil service etc outstripping productivity growth in every year since 2008 and by a huge margin compared to other sectors in H2 2011-present. 
  2. Trade sectors (agriculture, mining and manufacturing) are facing up to competitive pressures and are showing improvements in competitiveness since the start of 2011 despite general labour markets tightness.
  3. Non-tradable sectors (market services, construction, transport, etc) are showing increasing rate of decline in competitiveness in line with the rest of economy. However, the deterioration rates are shallower than those recorded in 2009-2010.
The most urgent policy objective for Russia, is to find a reforms mix to drive up productivity growth in non-market sectors. Cutting bureaucracy and introducing professional management in education, health and public services would be a natural step forward. Upskilling and creating performance-linked pay systems will help as well. Reforming health and education to 'money follows user' system of costs recovery can also work, especially in urban areas, where there is meaningful choice of providers. Centralising and making paperless (digitalising) social welfare, pensions and core public services payments systems is another 'must' (although this is partially on its way)

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