21/7/2014: Russian Economy 1995-2008: Growth Drivers and Future Potential

Very insightful paper on Russian economic growth - sources and drivers - over the period of 1995-2008. "When high growth is not enough:
Rethinking Russia’s pre-crisis economic performance" by Ilya Voskoboynikov and Laura Solanko (BOFIT Policy Brief 6/2014: www.bof.fi/bofit_en) looks at the role of labour productivity, capital deepening and tech/multifactor productivity contributions to growth.

Here are some of the findings:

"The Russian economy experienced a long period of growth from the mid-1990s to the 2008 financial crisis with annual GDP per capita growth averaging 3.7 % between 1995 and 2008." So spectacular growth compared to pre-1995 period and this much is known.

"According to the prevailing narrative, this growth was mainly driven by sustained increases in multifactor productivity stemming from removal of distortions created under the planned Soviet economy."

But was it?

"Using newly available, internationally comparable, data and the growth accounting methodology of Timmer and Voskoboynikov (2014), we argue that average annual multifactor productivity growth amounted to 2.6% over the period. This remarkably high growth indicates that productivity growth accounted for about 56% of Russia’s economic growth in the 13 years before to the global financial crisis."

More: "We found that MFP growth explained over 70 % of total value-added growth in the period 1995–2001, but less than 50% in the 2003–2008 period. As the contribution of labor held relatively constant at around 10%, our finding implies that increases in capital inputs, and, consequently, investments to fixed capital, have been even more important than previously thought for economic growth in Russia."

Capital deepening and upgrades are the core drivers on both value added and productivity growth sides. What about sectoral decomposition?

"Detailed analysis of industry-level data reveals that economic growth has been driven by two broad sectors: extended oil & gas and high-skill-intensive (HSI) services."

Per oil & gas sector: "Our analysis clearly shows that growth in the extended oil & gas has been driven by increases in capital inputs, i.e. investments into fixed capital. Given the huge investments in oil and gas pipelines, oil export terminals, and the commissioning of new gas fields commissioned in past decade, we find this quite plausible."

On High-Skill-Intensive sectors side: "Since the end of our data sample in 2008, investment growth has slowed in the wake of the global financial crisis and increased uncertainly over the general business climate in Russia. The rapid growth in HIS services such as financial services largely represented a catching up with more advanced markets. The level of multifactor productivity in relation to German levels in the high-skill intensive sectors climbed from just 12% at the start of the observation period to almost 50% at the end."

Key conclusion: "Neither rapid growth in investment in the extended oil & gas sector nor rapid catching-up in technology intensive service industries is likely to spur Russia’s growth in the next decade. This underlines the urgency of identifying and exploiting new growth drivers for Russia."

I am not sure I agree. For a number of reasons:

1. MFP and capital productivity growth have been concentrated in high-skills services and energy sectors. Next, there is room for substantial modernisation of capital base one technological utilisation in other sectors. That is a major potential source for growth into the future decade or two.
2. Labour productivity growth has ben sluggish and lagging the MFP growth. This is primarily down to demographic effects, which are by now being extinguished. This opens up new frontiers for growth in labour productivity in all sectors of economy, but primarily in sectors other than high-skills services and energy.
3. Structural reforms, if enacted, can open up Russian markets as platforms for exports to the Eurasian Economic Union states - a potential that is already there and can be further enhanced with suitable reforms.

So even from the top-level view, there are at least three major growth drivers that are yet to be explored.