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ECONOMIC ANNALS, Volume LV, No. 186 / July – September 2010 UDC: 3.33 ISSN: 0013-3264 Scientific Papers DOI:10.2298/EKA1086007S György Simon, Jr.* TECHNICAL PROGRESS AND ITS FACTORS IN RUSSIA’S ECONOMY ABSTRACT: In this paper long-term growth in Russia’s economy is viewed in the context of technical progress, based on both neoclassical and endogenous theories. The dynamics of economic growth with some aspects of catch-up development are examined, as well as capital deepening. TFP is quantified in terms of both output and productivity increases to reveal the leading role of embodied technical progress in productivity growth. An endogenous growth model helped to discern three complex factors of technical progress in the Russian economy, to which at the macro level a factor related to natural wealth (oil and gas resources) was added. This enabled the author to conclude that the most important macroeconomic factor of Russia’s technical progress in the half century from the early 1960s to the late 2000s was its immobile component. At the manufacturing level the situation was more complicated, as the initial leadership of creative technical progress was superseded by the dominance of the mobile factor. The collapse of the Soviet Union made the Russian economy more service-oriented and radically changed the conditions of economic modernisation, in which technology transfer ensured by FDI began to play a more prominent part, particularly after the default of 1998. KEY WORDS: technical progress, national economy, manufacturing, foreign direct investment, Russia JEL CLASSIFICATION: O33, O47, O14, C51, C22, F21, O53. * Independent Researcher, Corvinus University of Budapest, [email protected] 7 Economic Annals, Volume LV, No. 186 / July – September 2010 1. Introduction Technical progress implies the use of advanced scientific and technological achievements in the economy in order to raise the efficiency and quality of production processes for the better satisfaction of people’s needs. It is a continuous improvement of all sides of social production, on the basis of a mutually conditioned and complex development and ubiquitous utilisation of the achievements of science and technology, for a practical solution of socioeconomic problems. In other words, it is an uninterrupted process of introduction of new technology, new methods of organisation of production and work, based on achievements of scientific knowledge. The present paper deals with technical progress and its factors in the Russian economy, including its pulling sector, the manufacturing industry, in nearly half a century from the early 1960s to the late 2000s when the current global crisis broke out. The investigation is aimed at discerning types and factors of technical progress in the Russian economy and determining their contribution to economic performance. In this connection it should be stressed that the acceleration of technical progress is indispensable for Russia’s successful affirmation as one of the leading world powers in the 21st century, which can be achieved by promoting innovations and strengthening creativity and competitiveness. Different aspects of this subject have been discussed in specialist literature. Suvorov (2002) presented the methods and results of parameter estimations of a model of technological changes for the Russian economy in the period 1970–1990, including an estimated macroeconomic production function. He concluded that economic growth in Russia would have inevitably decelerated and declined even if the Soviet system had been retained. Trofimov (2002) estimated that a 3.5% – 4.7% average annual rate of technical progress in the next 15–20 years would result in the American level remaining twice as high as the Russian level. Braguinsky and Myerson (2007) elaborated a macroeconomic model of the Russian transition, which, by emphasising the role of oligarchic property rights, especially regarding natural resources, can adequately explain both the steep decline suffered by the Russian economy at the first stage of transition and the subsequent turnaround. Kalyuzhnova and Nygaard (2008) analysed the connection between resource nationalism and financial sector intervention in Russia and Kazakhstan. They found that the hydrocarbon sector boosted domestic credits through a number of direct and indirect routes. However sovereign wealth funds that were established in the majority of energy rich emerging economies 8 TECHNICAL PROGRESS AND ITS FACTORS IN RUSSIA’S ECONOMY may, to the extent that they enable the selection of winners in specific economic sectors, create path dependency or exacerbate longer term allocative inefficiency arising from the governance structure associated with resource nationalism. The contemporary situation in Russia’s manufacturing is characterised by diminishing competitiveness, segmentation, and structural problems of growth. Therefore it is necessary to strengthen sectoral competitiveness by raising the efficiency of production. A particular problem of Russian manufacturing is its unbalanced technological capital and an inadequately efficient use of the latter’s components. Thus an extreme obsolescence of equipment and a low level of expenditure on research and development (R&D) coexist with relatively high indicators of applied information and communication technologies (ICTs), endowment with qualified cadres and a relatively developed organisational infrastructure: R&D divisions and computer networks with ISO (International Organisation for Standardisation) certificates on management quality standards. All this evidences the necessity of integrating innovations with the investment process (cf. Golikova et al., 2007). Ahrend (2004) investigated a wide range of issues related to industrial restructuring in Russia. Based on sectoral data, he particularly examined labour productivity and unit labour costs (ULCs), and revealed comparative advantages for several industrial sectors. He found that from the late 1990s onwards there were impressive productivity increases in all major sectors, with the exception of those which were still predominantly state-controlled or suffered from strong state interference. Relative ULCs also adjusted considerably, as less competitive sectors experienced relatively slower wage growth and larger workforce reductions. However international competitiveness, as measured by revealed comparative advantage, remained limited to a small number of sectors that mainly produced primary commodities, in particular hydrocarbons, with a tendency to further specialise in resource-based exports. In this context the report by Golikova et al. (2007) already mentioned above focused on a firm-level microeconomic analysis, carried out by the method of direct interviews with top managers of Russia’s representative manufacturing companies. Ahrend, de Rosa, and Tompson (2007) examined the development of Russian and Ukrainian industry during the period 1995–2004 in an effort to ascertain to what extent Russian manufacturing had shown signs of succumbing to “Dutch disease”. They emphasised that Russia and Ukraine had begun to implement a similar strategy of market reforms with broadly similar institutions, industrial structures and levels of technology, the main difference being Russia’s 9 Economic Annals, Volume LV, No. 186 / July – September 2010 far greater mineral wealth. In their opinion Ukraine could provide a rough approximation of how a resource-poor Russia might have developed over the transition. The present paper has the following structure. After some theoretical considerations the main characteristics of Russia’s long-term economic growth will be examined, with a special emphasis on its capital coefficients, important from the viewpoint of technical progress. This will be followed by a detailed investigation of various types and factors of technical progress, employing the analytical tools of both the neoclassical and endogenous growth theories. Then structural changes and the economic role of foreign direct investment (FDI) will be analysed. Finally, the relevant conclusions will be drawn. 2. On the Function of Technical Progress The technical progress function is a concept originally developed by Kaldor (1957) to explain the growth rate of labour productivity as a measure of technical progress, which idea is also accepted in this paper. Kaldor described his function in the following statements: 1. The larger the growth rate of capital/input per worker, the larger the growth rate of output per worker, or labour productivity. The latter is thus explained by the growth rate of capital intensity. 2. In equilibrium, capital/input per worker and output per worker grow at the same rate, the equilibrium growth rate. 3. At growth rates below the state of equilibrium, the growth rate of output per worker is larger than the growth rate of capital/input per worker. 4. At rates above the equilibrium state, the growth rate of output per worker is smaller than the growth rate of capital/input per worker. Let us set off from the standard neoclassical production function (see Solow, 1956, 1957) presented as follows: ,(1) where Y is output, AO is a multiplier of efficiency, K is capital, L is labour, t is time, while αO, βO, and λ are the elasticity of output by capital, labour, and time, respectively. It is assumed that αO+βO =1, from which βO =1–αO, and that, 10 TECHNICAL PROGRESS AND ITS FACTORS IN RUSSIA’S ECONOMY in a situation of equilibrium, the parameter αO corresponds to the profit share. Furthermore, in this case it is also true that .(2) By putting in a logarithmic form both sides of this relation, we obtain (3) If AO =1, then lnAO =1. Thus, in order to quantify the role of embodied technical progress in productivity growth, the standard neoclassical model can be written down in the following form: ,(4) In relation (4), productivity growth is broken down into three main components. The first component is the embodied technical progress, showing the effect of change in capital intensity, the second is neutral technical progress, or total factor productivity (TFP, elasticity of output by time) and the third is a logarithmic residual (∆ε), which for the most part depends on cyclical fluctuations. Thus the standard neoclassical model essentially assigns change in productivity to the effect of two factors: embodied technical progress and TFP. For the rates of economic growth, the following relation can be defined: .(5) Here the expression can be interpreted as the rate of technical progress, or TFP. This residual implies that fluctuations in output are closely followed by technological changes. Thus we have a dynamic production function of a Cobb-Douglas type, which is first-degree homogeneous, with a variable marginal efficiency and a constant elasticity of output and which has an elasticity of factor substitution equalling unity. This function is characterised by constant returns to scale, a situation when 11 Economic Annals, Volume LV, No. 186 / July – September 2010 a proportional increase in the quantity of all production factors used leads to an increase in output in the same proportion. Applying it to the Russian economy, the parameter values cited in Table 1 were obtained by the ordinary least squares (OLS) method for the period 1960–2008 (see the initial data in the Appendix). Table 1. Parameters of the neoclassical production function for Russia Sphere National economy Manufacturing AO 4.949 2.92 lnAO 1.599 1.072 αO 0.372 0.43 βO 0.628 0.57 λ 0.00037 0.00023 Source: calculated from the Appendix. Economic growth is essentially an interaction of fundamental production factors, which results in the emergence of output. On this basis Simon Sr. (2008) elaborated an endogenous growth model that can map three fundamental types of technical progress, and thus economic growth and development, based on immobile, mobile, and creative effects. These effects reflect learning by doing, the equipment of workers with physical capital (fixed assets, arable land, and mineral resources) and the joint result of research intensity and education, respectively. The first two components operate at the place of application of new technology, the third one at the place of its creation. Any type of technical progress emerges as a common effect of several growth factors; therefore its mapping function is a complex factor. In the Simon model1, Y is the volume of output (gross domestic product or value added), K is fixed capital, L is employment, M means working and H schooling years, R is the number of researchers, i.e. scientists and engineers engaged in R&D, O is oil and gas resources, Z is arable land, and t is time in years. All these variables are a function of time. The time index (t) is put out in the case of retarded effects. In the formulas, a capital letter denotes a function and a small letter a parameter (except the variable t, see a detailed description in the Appendix). The model in its full form can be written down as follows: Y = gM exp[FK(GI + GM + GKR + GO)],(6) where the parameter g is the output produced without fixed capital during a working year that approximately corresponds to an economy’s initial level of 1 12 First called so by Ligeti (2002: 134). TECHNICAL PROGRESS AND ITS FACTORS IN RUSSIA’S ECONOMY productivity. Among the components in parentheses, GI is a function concerning the immobile, GM the mobile, and GKR the creative technical progress, whereas GO is a function pertaining to the effect of oil and gas resources. In formulas: GI = 1– exp{–gI FK – gZ FZ}; GM = gM FK exp(–gKM FK – gZM FZ); GKR = GH GR GT , where GH = gH FH exp(–gKM FK), GR = 1 + gR FR 2, and GT = exp(gTΔt), where Δt = t – 1950. GO = gO FO exp(–gHO FH – gOO FO – gZO FZ). The parameter gO of the oil factor is positive, the other parameters are related to negative effects. Education (FH) negatively affects the return to oil factor because the creative activity in mining is mostly absorbed by the exploration of oil and gas resources. Therefore the latter’s separately accountable result is relatively smaller. In the approximate formula for a national economy, this relationship appears in an inverse form. Among the two other negative effects, the first (gOO FO) is connected with the fact that countries immensely rich in oil and gas annually extract relatively less of their reserves; the second (gZO FZ) indicates that in agrarian countries the economic importance of oil and gas production is usually smaller. A positive feature of relation (6) is that it makes the effect of oil and gas resources on economic growth easily measurable. However, at a national economy level, the formula GO yields realistic results concerning the role of the oil factor only in the case of countries having great oil and gas resource intensity. Intensity functions: FK = ln (1 + nK K/L) (capital intensity function); FH = ln (1 + nH H/L) (education function); FR = ln (1 + nR Rt–2 /L) (research intensity function); FZ = ln (1 + nZ Z/L) (arable land intensity function); FO = ln (1 + nO Ot–1/L) (mineral resource intensity function). 13 Economic Annals, Volume LV, No. 186 / July – September 2010 The normalising coefficients are nK = 1/385, nH = 1, nR = 1, nZ = 1, and nO = 1/1000, where the parameter nK refers to the 2000 dollar prices. These are rounded values, which do not differ significantly from the estimated ones. Simon Sr. considered the rise in productivity (Y/L, Y/M) due to technical progress embodied in physical and human capital as the main characteristic of economic development. He denied the existence of disembodied technical progress, depending exclusively on time. In this connection, it is noticeable that Kaldor (1957) in his function of technical progress, like Simon Sr., counted on the rise in the elasticity of output by fixed capital owing to an increasing intensification of production, but in contrast to the latter author, regarded the given phenomenon through the prism of investment. The Kaldorian growth model based on a function of technical progress assumes a single relationship between increases in capital and productivity, which includes the effect of both factors. It indicates at what rate labour productivity grows in the course of rising capital accumulation which makes possible an increasing use of inventions. Technical progress in Kaldorian terms is realised in the wake of investment; thus the function of technical progress is closely related to an investment function. Investment is a function of the growth rate of production through the accelerator effect, and the relationship between capital and production is also a function of the expected profit rate (cf. Mátyás, 1999: 541, 543). In Schumpeter’s theory (see Schumpeter, 1939), technical progress, or rather innovation, is the driving force of both economic growth and structural transformation. In the course of creative destruction, the economic position of sectors based on old technology is driven back, whereas sectors related to new technology begin to rise. Retrospections in economic history (e.g. Freeman and Soete, 1997) indicate that creative destruction occurring under the impact of technological development took place primarily in industry. According to analysts (Verspagen, 2000), it was in the 1990s that an innovation starting a new Kondratieff cycle, or rather the radical renewal of ICTs as a result of several innovations, first of all exerted its effect not in manufacturing, but in the field of services, where it brought spectacular changes. 14 TECHNICAL PROGRESS AND ITS FACTORS IN RUSSIA’S ECONOMY Table 2. Parameters of the Simon model No. 1 2 3 4 5 6 7 8 9 10 11 12 13 Denotation g gI gM gH gR gT gZ gKM gZM gO gHO gOO gZM Estimated value 522 0.0781 0.319 0.273 278 0.0065 0.082 0.34 0.30 1.94 1.54 0.47 0.75 t statistics 22.46 22.45 22.42 22.29 17.44 20.28 20.95 -22.52 -19.14 16.45 -19.04 -19.34 -8.46 Source: Simon Sr. (2008: 20). Technical progress can also be interpreted with the help of the Simon model described above, which is first-degree homogeneous, similarly to the neoclassical production function. As its parameters were determined on the basis of a worldwide investigation using data on 131 countries (see Table 2), this is a world model supposed to be applicable for any country.2 Similarly to the Solow model, the returns to factors of technical progress here can be written down additively by a logarithmic conversion of both sides of relation (6). The difference is that in our case the point is the returns to factors of technical progress, except labour. For this investigation, the following form of the Simon model was used with the parameters listed in Table 2: Δln (Y/gM) = ΔFKGI + ΔFKGM + ΔFKGKR + ΔFKGO + Δε, (6a) where ε is the estimation error and Δε characterises the deviations from the world level, reflecting changes which do not explicitly figure in the model. Thus, joint factor efficiency can be compared to international standards. 2 See Simon Sr. (2005). Here the list of investigated countries can be found. Russia does not figure explicitly among them, but the former Soviet Union does. 15 Economic Annals, Volume LV, No. 186 / July – September 2010 Table 3. Fit of the Simon model for Russia (Dependent variable: Y/M) Number of observations National economy* 343 Manufacturing 196 Sphere Annual 0.9624 0.6846 R2 Cumulative 0.9994 0.9933 Standard error (%) Annual Cumulative 3.8 0.9 10.1 2.3 * Aggregated Note. Here R 2 is the uncorrected coefficient of determination, considering that the parameters of the model were not estimated specially for Russia. Source: calculated from the Appendix. As is visible in Table 3, the high determination fits the actual productivity values of Russia, and the standard errors are also acceptable. The cumulative results are better than the annual ones, i.e. the estimation errors do not cumulate but decrease in time. This is a general feature of the fit of this model, describing in essence the process of economic development. 3. Main Growth Characteristics What were the general conditions of long-term economic growth in Russia? In the period under consideration, the Soviet model, designed for a speedy shift from a relatively backward nation3 to a modern industrial society, showed symptoms of a dysfunctional development. Though Khrushchev made an early attempt to decentralise economic management in the late 1950s and early 1960s, his heavy-handed approach determined the failure of this experiment. The economic reform announced by Brezhnev and Kosygin in 1965 aimed at widening the autonomy of enterprises and making them more profit-oriented. Economic bureaucracy was reorganised following the branch principle of management, and associations of industrial enterprises were created, as well as research institutes for scientific planning. However the events in Czechoslovakia in 1968 ushered in an era of recentralisation in the over-industrialised Russian economy, which needed constant adjustments, whereas central planners turned to be unable to deal with increasing environmental and other problems. Monopolistic producers and 3 16 One should not forget that by the outbreak of World War I, Tsarist Russia had already become the fifth most developed industrial nation in the world. Cf. Samuelson and Nordhaus (2005). TECHNICAL PROGRESS AND ITS FACTORS IN RUSSIA’S ECONOMY risk-averse managers (“red directors”) lacked the impetus to innovate, which led to technological backwardness as the Schumpeterian creative destruction (see e.g. Mátyás, 1999: 293–294) failed to materialise. Moreover, guaranteed full employment favoured labour-intensive production and disguised unemployment hidden inside enterprises, as pointed out by Kornai (1993), Balcerowicz (1995), and others. Soft budget constraints resulted in a wasteful utilisation of resources when the costs of non-profitable production were borne solely by the Soviet state. Limited exposure to international trade made domestic production uncompetitive, except for raw materials and some military goods. Gorbachev’s perestroika (1985–1991) re-enacted the 1965 self-accounting enterprise reform in the 1987 Enterprise Law and introduced various forms of property ranging from cooperatives to individual proprietorships. But its negative consequence was the fragmentation of production units as cooperatives emerged within industrial enterprises in accordance with the 1988 Law on Cooperation. Despite the recognition of private property perestroika was unsuccessful in questioning state ownership and had died out completely by the early 1990s. It was the collapse of the Soviet Union in December 1991 that gave a decisive impetus to economic transition in Russia. However, the Russian transition turned out to be a nomenclature revolution, as the power elites successfully consolidated their political dominance with economic wealth. The shock therapy carried out under Yeltsin’s presidency (1991–1999) and initially connected with the name of Yegor Gaidar intended to put the economy on a rebound growth track, but this was completely achieved only after the default of 1998. Although Russia liberalised its economy, it had long been unable to maintain discipline through hard budget constraints and to contain tunnelling.4 The state was captured by a narrow set of vested interests, while capital flight severely undercut investment. Privatisation has not created effective corporate governance, despite the fact that it introduced new owners of plants and equipment. This situation prolonged the transformational crisis. As a consequence the Russian economy, and especially its manufacturing sector, showed the first perceptible signs of improved performance only in the wake of an increase in oil prices at the turn of millennium, which actually coincided with Putin’s coming to power (see Rosser and Rosser, 2004: 272–295). As for manufacturing, the revaluation of the rouble in the early 2000s encouraged Russian enterprises to cut their costs and raise competitiveness by applying advanced technologies (Weiner, 2004: 5). 4 Tunnelling implies expropriation of assets and income belonging to minority shareholders, as well as theft through either rule of law or administrative control (World Bank, 2002: xviii). 17 Economic Annals, Volume LV, No. 186 / July – September 2010 Table 4. Average annual change rates of GDP and MVA (at comparable prices of 2000, %) Period 1961–2008 1961–1990 1991–2008 1961–1970 1971–1980 1981–1990 1991–1998 1999–2008 Gross domestic product Russia EU-15 US 2.54 2.98 3.25 3.73 3.52 3.54 0.59 2.07 2.77 5.16 4.99 4.19 3.58 3.16 3.19 2.47 2.44 3.26 -6.71 1.96 3.08 6.84 2.17 1.39 Manufacturing value added Russia EU-15 US 2.78 2.67 3.43 5.89 3.39 3.45 -2.20 1.46 3.39 8.62 5.90 4.39 5.86 2.57 3.04 3.25 1.75 2.93 -13.38 1.20 4.08 7.77 1.67 2.83 Calculated from: Народное хозяйство РСФСР/РФ, ЦСУ/Госкомстат, Москва; Poccийcкий cтaтиcтичecкий ежегодник, Poccия в цифрах, Национальные счета Росcии, Госкомстат/ Poccтaт, Мocквa; National Accounts Statistics, UN, New York; Main Economic Indicators, National Accounts, OECD, Paris; International Yearbook of Industrial Statistics, UNIDO, Vienna; Statistical Abstract of the United States, Bureau of the Census, Washington, D.C., various volumes; Kuboniwa (1997); Eurostat, New Cronos database; U.S. Department of Commerce, Bureau of Economic Analysis. The data in Table 4 show Russia’s rate of economic growth between 1961 and 2008 as compared to the European Union (EU-15) and the United States. It is visible that Russia’s manufacturing value added (MVA) increased on average somewhat more rapidly than gross domestic product (GDP) if one regards the whole investigated period. In this respect Russia’s development was similar to that of the US, but not the EU, where the situation was the reverse. The country’s average growth rate slightly exceeded that of the EU exclusively in manufacturing, being below that of the US macro economically. However if shorter periods are considered the picture becomes more subtle. Thus in terms of GDP growth, the Soviet era (1961–1990) was unequivocally more successful than the transition (1991–2008), whereas MVA by 2008 attained only 67% of its 1990 level. Between 1961 and 1990 a deceleration of growth could be observed in both the national economy and manufacturing, which later turned into a deep transformational recession, whereas the recovery and consolidation after 1998 resulted in high rates of economic growth in both spheres (but especially in manufacturing) well above those of the European Union and the United States. It should be noted that during the Soviet era GDP was not officially calculated, and subsequent estimates gave different results (see the relevant discussion in Rosefielde, 2003 and Harrison, 2003). In this paper the corresponding indicator 18 TECHNICAL PROGRESS AND ITS FACTORS IN RUSSIA’S ECONOMY of Soviet Russia was calculated on the basis of Kuboniwa’s (1997) research. The national income statistics of the Soviet Union (Material Product System – MPS) differed from the UN methodology (System of National Accounts - SNA) in that it comprised only the sectors of material production and did not include depreciation, i.e. the consumption of fixed capital. Table 5. GDP per inhabitant Year 1960 1970 1980 1990 1998 2008 Russia EU-15 US in U.S. dollars of 2000, at PPP* 5 601 8 525 14 039 8 520 12 873 18 648 11 387 16 844 23 037 13 564 20 909 28 895 7 793 23 802 33 323 15 801 28 185 38 849 Russia/EU-15 Russia/US in % 65.7 39.9 66.2 45.7 67.6 49.4 64.9 46.9 32.7 23.4 56.1 40.7 * At purchasing power parity. USD 1 = Rbl. 5.40 and EUR 0.92. Calculated from: see Table 4, as well as OECD Factbook: Economic, Environmental and Social Statistics, Paris, various volumes; Heston, Summers, and Aten (2006). From the beginning, the development of the Russian economy was of a catchup nature, as illustrated by data in Table 5. However, these data indicate that between 1960 and 2008 Russia’s living standard measured by GDP per inhabitant somewhat declined in comparison to the average level of the EU and rose only slightly in relation to the United States. In this respect a convergence had been clearly observable until 1980, after which an opposite tendency prevailed. Nevertheless between 1998 and 2008 Russia’s GDP per inhabitant almost doubled relative to the corresponding EU and US indicators. Catch-up development can also be measured in terms of wage convergence, which is also an important aspect. Available data allows us to consider this question by taking a look at long-term trends in monthly wages in Russian manufacturing. From data in Table 6 it can be calculated that in 1961–2008, real wages in Russia’s manufacturing increased on average by 2.05% per annum. This figure can be contrasted to the 3.13% average increase in manufacturing productivity in the same period (see the Appendix), which was also more rapid than the 2.78% increase in MVA (Table 4), showing that Verdoorn’s law was generally valid. The growth rate of manufacturing wages was thus lower than that of productivity, which is a healthy tendency from an economic point of view. It showed a decelerating trend in Soviet times, followed by a sharp decline during 19 Economic Annals, Volume LV, No. 186 / July – September 2010 the transitional crisis and an unprecedented acceleration thereafter. The causes of this acceleration were mostly of political nature, as the ruling elites were busy ensuring their continued electoral support. The relative wage level in comparison to the United States increased 2.4 times between 1960 and 2008. Here there was a constant convergence until 1990, followed by an abrupt divergence until 1998. As a result of the ensuing stabilisation, Russia’s manufacturing wages by 2008 again reached about two-fifths of the American level, similar to the situation in 1990 (Table 6). Table 6. Real wages in Russian manufacturing 2000 U.S. dollars Average annual Year at PPP Index: 1960 = 100.0 change per month* in % 1960 1970 1980 1990 1998 2008 397.85 567.56 802.15 1093.19 412.19 1055.54 100.0 142.7 201.6 274.8 103.6 265.3 – 3.62 3.52 3.15 -11.48 9.86 Relative wage level in percentage of the United States 17.7 22.1 30.6 43.2 16.0 42.0 * USD 1 = Rbl. 5.58. Calculated from: Народное хозяйство РСФСР/РФ, Poccийcкий cтaтиcтичecкий ежегодник, Poccия в цифрах; Statistical Abstract of the United States; Yearbook of Labour Statistics, ILO, Geneva, various volumes; Heston, Summers, and Aten (2006). Erdős (2006: 110) emphasises that catching-up is impossible without accelerating technological development and requires an increase in R&D spending. The difference between fast and slowly developing economies mostly arises from the fact that the former sooner adopt or introduce new technology into production, which is partly the result of their own R&D. As industry, primarily manufacturing, today is still to a significant extent the main field of technological development, it is mostly here that goods embodying modern technology must be produced. Therefore economic policy aimed at accelerating technological development also appears as a part of industrial policy. 20 TECHNICAL PROGRESS AND ITS FACTORS IN RUSSIA’S ECONOMY Table 7. Gross expenditure on research and development (GERD) in percentage of GDP Year 1990 1998 2008 Russia 2.03 0.95 1.03 EU-15 1.96 1.84 1.99 United States 2.63 2.58 2.76 Sources: UNESCO Data Centre, Institute for Statistics, Montréal; Eurostat, New Cronos database. As seen from Table 7, Russia’s R&D expenditure in relation to GDP declined by about a half between 1990 and 2008, having become by a half and by twofifths lower than the respective indicators of the EU and US. This was a negative consequence of the collapse of the Soviet Union, which, inter alia, resulted in a freeze of many research programmes. As already noted above, growth mechanism, or the mechanism of technical progress, is an interaction of various production factors. Therefore in order to reveal some general relations it is expedient to compare output to the main production factors (or vice versa) one by one. In specialist literature the subjects of such investigations are most usually investment (I), capital stock (fixed capital, K), and labour (L). But the economic impact of technical progress cannot be considered in isolation. Development needs investment, which supposes saving, and it is necessary to examine efficiency and its determinant factors to see what is a sufficient level of saving. The most important element of this system of relations is technological development (cf. Erdős, 2006: 21), the process of which should be examined together and in connection with two capital coefficients – the capitaloutput ratio (K/Y) and its incremental type, which relates investment share in GDP to the rate of GDP growth, since economic growth is inseparable from capital and investment. The capital-output ratio is a stock and the incremental capital-output ratio (ICOR) is a flow variable. The former is the inverse of capital productivity (Y/K), while the latter shows the rate of investment attainable with a 1% increase in the volume of GDP, thus reflecting the efficiency of investment. At a given capital coefficient, the acceleration of technological development can lead to faster economic growth only if the rate of investment has risen (Ibid. 13–14). 21 Economic Annals, Volume LV, No. 186 / July – September 2010 Table 8. The capital-output ratio in Russia (K/Y, annual averages) Period National economy Manufacturing 1961–2008 1961–1990 1991–2008 1961–1970 1971–1980 1981–1990 1999–2008 2.26 1.60 3.24 1.07 1.41 2.00 3.05 2.09 1.31 3.58 1.05 1.18 1.49 3.72 Manufacturing/ National economy 0.92 0.82 1.10 0.98 0.84 0.75 1.22 Calculated from: see the Appendix. In the course of nearly five decades of economic development in Russia there was capital deepening, as the country’s capital-output ratio (K/Y) seriously deteriorated in the course of transition to a market economy in comparison to the average of the Soviet era. However, even then the indicator was continuously increasing in points if shorter periods are considered. Its value was on the whole lower in manufacturing than at a macro level, although after 1990 the reverse became true (see Table 8). Table 9. The ICOR coefficient in Russia (annual averages, based on constant price data) Period 1961–2008 1961–1990 1991–2008 1961–1970 1971–1980 1981–1990 1999–2008 Rate of investment* (1) 17.52 21.34 11.92 16.32 20.61 24.31 7.94 Growth rate of GDP (2) 2.54 3.73 0.59 5.16 3.58 2.47 6.84 ICORt–1 (1:2) 6.90 5.72 20.20 3.16 5.76 9.84 1.16 * Share of gross fixed capital formation in GDP considering a one-year lag. Calculated from: Народное хозяйство РСФСР/РФ, Poccийcкий cтaтиcтичecкий ежегодник, Poccия в цифрах, Национальные счета Росcии, various volumes; Kuboniwa (1997). The evaluation of the supply role of investment on the basis of the ICOR indicator is very problematic, as the capital-replacing and labour-saving role of investment 22 TECHNICAL PROGRESS AND ITS FACTORS IN RUSSIA’S ECONOMY and the time lag are not taken into consideration. Therefore the relevant indicator for Russia was calculated considering a one-year lag. As is apparent from Table 9, this indicator differed significantly from its average value in the individual phases of Russia’s development, being on the whole worse during transition then under socialism. But regarding shorter periods, investment efficiency continuously worsened even in the socialist era. A significant improvement in this respect occurred only after the default of 1998, although this happened primarily due to a drastic fall in the rate of investment. However, it cannot be disregarded that the growing capital stock absorbed an increasing part of investment for replacement requirements, and that with rising wages the share of labour-saving investment presumably expanded. Therefore the dynamics of investment efficiency seems to be worse on the basis of the ICOR indicator than in reality. Table 10. Productivity (Y/L) growth in Russia (1960 = 1.00) Sphere National economy Manufacturing Manufacturing/ National economy 1970 1.40 1.69 1980 1.73 2.66 1990 2.15 4.00 1998 1.46 2.22 2008 2.64 4.39 1.21 1.54 1.86 1.52 1.66 Calculated from: Народное хозяйство РСФСР/РФ; Poccийcкий cтaтиcтичecкий ежегодник, Poccия в цифрах; International Yearbook of Industrial Statistics; Yearbook of Labour Statistics, various volumes. Russian data on productivity change are contained in Table 10. Two main conclusions can be drawn from them. 1. Productivity in Russia rose continuously until the end of the Soviet era, both in the national economy and manufacturing. Between 1990 and 1998 it declined by five-sevenths in the former sphere and by about a half in the latter. During the post-default recovery, it roughly doubled in both spheres. 2. In the investigated period productivity was rising more rapidly in manufacturing than in the total economy. What was the role of productivity and staff change in Russia’s economic growth? Using the relation ΔlnY = Δln(Y/L) + ΔlnL, the data in Table 11 were obtained. 23 Economic Annals, Volume LV, No. 186 / July – September 2010 Table 11. Contribution of productivity and staff change to economic growth in Russia (in %, ΔlnY/L = 100.0) Factor 1961–2008 1961–1990 1991–2008 1961–1970 1971–1980 1981–1990 1999–2008 Δln (Y/L) Δln L 80.6 19.4 69.8 30.2 Δln (Y/L) Δln L 112.5 -12.5 87.6 12.4 National economy 193.9 67.2 -93.9 32.8 Manufacturing – 63.7 – 36.3 60.4 39.6 94.2 5.8 89.8 10.2 79.1 20.9 127.5 -27.5 91.4 8.6 Calculated from: see Table 10. The calculations show that on average over a five decade period (1961–2008), rising productivity accounted for about four-fifths of economic growth in Russian manufacturing and expanding employment for the remaining onefifth, The growth of output was exclusively ensured by the rise in productivity, compensating for the contraction in employment. In the Soviet period (1961– 1990), augmentation of the workforce gave almost a third of macroeconomic and an eighth of manufacturing growth, whereas under transition (1991–2008) it was productivity rise that accounted for total growth in the national economy. Considering shorter periods, staff change played a diminishing role between 1961 and 1990, and in manufacturing it even became negative after 1980. At the same time during the post-default consolidation of 1999–2008 improving productivity ensured about nine-tenths of the achieved rate of GDP and MVA growth. 4. Technical Progress and Its Determinants There is no technical progress without economic growth, which is affected by many factors, as discussed above. Of these two are of key importance: (1) physical and human capital accumulation per inhabitant or per person employed, and (2) changes reflecting technical progress and the related structural shifts, expressed by the indicator of total factor productivity. All other factors affect the rate of economic growth through these two processes. Whereas economic growth is a quantitative change, economic development leads to qualitative improvements in the use of production factors, accompanied by structural change. In practice, however, quantitative growth is closely related to qualitative development, as all countries and social systems are, in a certain sense, permanently developing. 24 TECHNICAL PROGRESS AND ITS FACTORS IN RUSSIA’S ECONOMY Table 12. Total factor productivity in the Russian economy Average annual change Period Y K 1961–2008 1961–1990 1991–2008 1961–1970 1971–1980 1981–1990 1999–2008 2.54 3.73 0.59 5.16 3.58 2.47 6.84 4.82 7.05 1.20 7.96 7.50 5.70 1.42 1961–2008 1961–1990 1991–2008 1961–1970 1971–1980 1981–1990 1999–2008 2.78 5.89 -2.20 8.62 5.86 3.25 7.77 5.48 7.83 1.68 10.16 8.04 5.33 2.19 in % L A National economy 0.49 0.44 1.11 0.41 -0.55 0.49 1.66 1.16 1.40 -0.09 0.28 0.17 0.67 5.89 Manufacturing -0.34 0.61 1.11 1.89 -2.72 -1.37 3.05 2.51 1.20 1.72 -0.88 1.46 0.64 6.47 Contribution to value added growth K L A 70.5 70.2 76.3 57.4 77.9 85.8 7.7 12.2 18.8 -59.4 20.1 24.6 7.3 6.2 17.3 11.0 83.1 22.5 -2.5 6.9 86.1 84.9 57.2 – 50.7 59.0 70.5 12.1 -6.8 10.7 – 20.2 11.6 -15.4 4.6 21.9 32.1 – 29.1 29.4 44.9 83.3 Source: calculated from the Appendix. What characterised the change of main growth factors and TFP in the Russian economy during the investigated period? To answer this question the TFP indicator for Russia was calculated using relation (5) with the parameter values cited in Table 1. From the obtained results in Table 12 it is apparent that between 1961 and 2008 fixed assets in Russia increased more rapidly than GDP and value added both at a macro level and in manufacturing. The only exception was the Putin consolidation of 1999–2008. Thus capital intensity, K/L, became higher, implying that this general regularity was valid for Russia also. (This can also be interpreted as a rise in the level of capital accumulation, to which the neoclassical approach likes to reduce economic development. Cf. Slay, 2005: 7.) Overall fixed capital made the highest contribution to economic growth, followed by total factor productivity and employment. However, on the whole manufacturing employment was diminishing and thus its role in MVA growth was negative regarding the whole study period. TFP usually showed a slower rise in the national economy than in manufacturing, except during the period 1991–2008 when it was falling, along with MVA (see Table 12). 25 Economic Annals, Volume LV, No. 186 / July – September 2010 Table 13. Factors of productivity growth in Russia according to the standard neoclassical model Period 1961–2008 1961–1990 1991–2008 1961–1970 1971–1980 1981–1990 1999–2008 1961–2008 1961–1990 1991–2008 1961–1970 1971–1980 1981–1990 1999–2008 Annual average in % In percentage of Δln (Y/L) Δln (Y/L) α∆ln (K/L) λ ∆t ∆ε α∆ln (K/L) λ ∆t ∆ε National economy 2.023 1.569 1.781 -1.327 77.6 88.0 -65.6 2.556 2.121 1.837 -1.402 83.0 71.9 -54.9 1.136 0.648 1.599 -1.111 57.0 140.8 -97.8 3.381 2.232 1.659 -0.510 66.0 49.1 -15.1 2.122 2.171 1.763 -1.812 102.3 83.1 -85.4 2.303 1.960 1.754 -1.411 85.1 76.2 -61.3 5.943 0.276 1.575 4.092 4.6 26.5 68.9 Manufacturing 3.081 2.441 1.097 -0.457 79.2 35.6 -14.8 4.616 2.766 1.210 0.640 59.9 26.2 13.9 0.523 1.900 0.930 -2.307 363.3 177.8 -441.1 5.258 2.875 1.005 1.378 54.7 19.1 26.2 4.507 2.812 1.261 0.434 62.4 28.0 9.6 4.082 2.612 1.371 0.099 64.0 33.6 2.4 6.834 0.653 0.905 5.276 9.6 13.2 77.2 Source: calculated from the Appendix. The data in Table 13 show that Russia’s average growth rate of productivity in the period under consideration was higher in manufacturing than in the total economy, with the exception of the reform period of 1991–2008 when the reverse was true. What was the role of different types of technical progress in Russia’s productivity growth? To quantify this role, relation (4) was applied considering the relevant data from the Appendix. Assuming that the value of parameter α had already been known both for the national economy and manufacturing (see Table 1), only the second component of the relation at issue had to be estimated here. The obtained results are summarised in Table 13. They show that in the investigated period embodied technical progress generally ensured the largest part of productivity growth in Russia. The share of this factor and TFP, or neutral technical progress, tended to rise in manufacturing over the Soviet era, while at a macro level it decreased after 1980. Embodied technical progress managed on the whole to preserve its leadership during the transition (1991–2008), despite the fact that it became marginalised after 1998. 26 TECHNICAL PROGRESS AND ITS FACTORS IN RUSSIA’S ECONOMY One of the most serious problems with the neoclassical model is that the concrete causes of changes in TFP are not known. It is primarily this problem that theories of endogenous growth have tried to solve. The most obvious explanation is that it is not enough to consider only physical (fixed) capital, since in the modern economy a very significant role is also played by human capital, i.e. the education of workers and R&D. In essence it is this conception that took a concrete form in the endogenous growth models known from specialist literature (cf. Simon Jr., 2006). Here we will endeavour to surmount this problem by using the Simon model described above. For the purpose of our investigation relation (6a) was applied considering Russia’s data from the Appendix. The results thus obtained are shown in Tables 14 and 15. Table 14. Returns to factors of technical progress in Russia’s economy* Period 1961–2008 1961–1990 1991–2008 1961–1970 1971–1980 1981–1990 1999–2008 (0) 2.023 2.556 1.136 3.383 2.121 2.188 5.946 Annual average in % (1) (2) (3) (4) 1.540 0.394 0.136 0.010 2.065 0.373 0.176 0.013 0.772 0.315 0.073 0.006 2.991 0.271 0.233 0.014 1.718 0.299 0.148 0.011 1.599 0.473 0.151 0.013 3.990 1.701 0.381 0.030 (5) -0.057 -0.071 -0.030 -0.126 -0.055 -0.048 -0.156 In percentage of Δln (Y/gM) (1) (2) (3) (4) (5) -2.8 0.5 6.7 76.1 19.5 -2.8 0.5 6.9 80.8 14.6 -2.6 0.5 6.4 68.0 27.7 -3.7 0.4 6.9 8.0 88.4 -2.6 0.5 7.0 81.0 14.1 -2.2 0.6 6.9 73.1 21.6 -2.6 0.5 6.4 67.1 28.6 * Calculated from aggregated data. Notes. (0) = Δln(Y/gM), (1) = ΔFKGI, (2) = ΔFKGM, (3) = ΔFKGKR, (4) = ΔFKGO, (5) = Δε. Source: see the Appendix. Table 15. Returns to factors of technical progress in Russia’s manufacturing Period 1961–2008 1961–1990 1991–2008 1961–1970 1971–1980 1981–1990 1999–2008 (0) 3.084 4.619 0.525 5.267 4.508 4.081 6.838 Annual average in % (1) (2) (3) 1.036 1.758 0.444 1.986 2.310 0.577 0.094 0.360 0.092 2.992 2.165 0.553 1.893 2.263 0.568 1.232 2.400 0.588 1.080 4.807 1.238 (4) -0.154 -0.254 -0.021 -0.443 -0.216 -0.139 -0.287 In percentage of Δln (Y/gM) (1) (2) (3) (4) -5.0 33.6 57.0 14.4 -5.5 43.0 50.0 12.5 -4.0 17.9 68.6 17.5 -8.4 56.8 41.1 10.5 -4.8 42.0 50.2 12.6 -3.4 30.2 58.8 14.4 -4.2 15.8 70.3 18.1 Notes. (0) = Δln(Y/gM), (1) = ΔFKGI, (2) = ΔFKGM, (3) = ΔFKGKR, (4) = Δε. Source: calculated from the Appendix. 27 Economic Annals, Volume LV, No. 186 / July – September 2010 What conclusions can be drawn from these calculations? 1. The Russian economy’s actual performance was lower than that according to the model up to the end of the study period. Its rich oil and gas resources were not of crucial importance from the viewpoint of technical progress. 2. The performance of manufacturing in the selected years deviated more from that according to the model than the performance of the national economy. 3.At a national economy level, the share of immobile technical progress was the largest with a diminishing tendency. The mobile technical progress stood second, with a rising tendency. At the same time the share of creative technical progress that was in third place somewhat decreased after 1990, whereas the oil factor continued to play a marginal role. 4. In manufacturing the weight of creative technical progress was much greater than in the national economy. Moreover between 1961 and 1970 it even had an absolute dominance. However, because of a constant decline, the leadership later passed over to mobile technical progress, which retained and strengthened its leading position up to the end of the study period. The share of immobile technical progress also increased, which allowed it to come second after 1998. What characterised the intensity indicators of Russia, in comparison to those of the United States as representing the advanced world level? From Table 16 it can be ascertained that between 1960 and 2008 Russia came nearest to the American level in terms of intensities related to mineral resources and arable land regarding the total economy, and in terms of capital intensity regarding manufacturing. Macro economically Russia’s mineral resource intensity became 8.6 times, its capital intensity 4.3 times, its arable land intensity 1.7 times, and research intensity 1.4 times larger compared to the corresponding indicators of the United States. On the other hand its education intensity fell back by about a tenth. At the same time, in manufacturing capital intensity showed a 4.1-fold increase and research intensity a 1.2-fold increase. The disintegration of the Soviet Union worsened the situation in many respects. As seen from Table 16 by the end of the investigated period Russia’s capital intensity had achieved only about a fifth of the US level in the national economy and about a third in manufacturing, which testifies to a relatively backward technological base (at least as far as civilian production is concerned). Considering research intensity the situation had been much better for a long time. In this respect by 1980 Russia managed to attain four-fifths of the corresponding US indicator in manufacturing and exceed it almost twice at a macro level. However by 2008 the 28 TECHNICAL PROGRESS AND ITS FACTORS IN RUSSIA’S ECONOMY brain drain that began with the collapse of the USSR resulted in the decline of the relative research intensity in Russia to around four-fifths in the national economy, and to less than a third in manufacturing, as compared to the United States. Table 16. Intensities in the Russian economy Indicator, unit of measurement K/L USD 103 per person H/L years per person Rt–2/L per mille Z/L hectares per person Ot–1/L tonnes per person K/L USD 103 per person Rt–2/L per mille 1960 1970 1980 1990 1998 2008 National economy* 10.97 (5.3) 19.99 (8.5) 35.83 (14.1) 60.68 (21.2) 77.11 (24.7) 83.04 (22.6) 8.91 (104.9) 3.07 (58.9) 10.19 (106.9) 7.54 (111.9) 10.29 (86.8) 10.49 (178.7) 11.71 (99.7) 11.67 (152.2) 11.08 (92.4) 8.81 (110.4) 11.66 (94.9) 6.81 (83.6) 2.45 (90.7) 2.10 (90.5) 1.83 (97.3) 1.76 (112.8) 2.01 (148.9) 1.81 (153.4) 211.36 (135.5) 266.77 383.30 542.89 (177.0) (435.7) (861.0) Manufacturing* 746.38 (1261.6) 758.76 (1160.5) 4.33 (7.8) 3.56 (23.5) 8.45 (11.9) 10.63 (53.7) 56.76 (38.3) 21.67 (60.0) 66.07 (31.9) 15.01 (29.3) 16.25 (17.3) 16.06 (81.6) 29.83 (25.3) 20.58 (61.6) * In parentheses, Russia in percentage of the United States. Calculated from: see the Appendix, as well as Statistical Abstract of the United States, various volumes; The National Science Foundation, Arlington, Virginia, USA. How did the average elasticity of output by growth factors change over the investigated period? Data in Table 17 allow us to draw several conclusions in this connection. 1.The elasticity of output by growth factors has greatly changed and is also different by sectors, mostly following certain tendencies. 29 Economic Annals, Volume LV, No. 186 / July – September 2010 2. The elasticity by fixed capital at a macro level was on the whole higher in the Soviet era than during transition. Considering shorter periods, it showed an increasing tendency between 1961 and 1990, and in 1999–2008 it was higher in manufacturing than in the national economy. 3. The weight of education was usually greater in the national economy than in manufacturing. 4. The elasticity by researchers was on the whole better in manufacturing than in the national economy. After 1990 it deteriorated at a macro level, and after 1998 in both spheres, with a fall in the number of R&D personnel as a result of increased brain drain and uncertainties brought by market reforms. 5. The role of the time factor increased, as the time of creative economic activity figured in the model made it possible to produce increasingly large results. 6. The role of arable land in the Russian economy showed a diminishing trend due to a declining share of agriculture in production and employment, which will be discussed below. 7. The situation of workers in production is fundamentally determined by the sum of elasticities of output by the factors L and M, the indicator L+M. If it is positive it will pay off for the entrepreneurs to draw new workers into production. If, on the other hand, it is negative, then reducing personnel will be more advantageous. However the conditions of state socialism in Russia before 1991, when there were soft budget constraints in the economy, substantially modified this picture. In the investigated period the indicator L+M in the Russian economy was on the whole positive at a macro level, and negative in manufacturing where employment had already begun to decline in the 1980s. Table 17. Average elasticity of output by growth factors in Russia Period K H 1961–2008 1961–1990 1991–2008 1961–1970 1971–1980 1981–1990 1999–2008 3.666 3.354 2.153 1.758 2.518 2.679 0.162 0.132 0.157 -0.038 0.220 0.023 0.499 0.056 1961–2008 1961–1990 1991–2008 4.375 1.880 -1.057 0.113 0.069 0.013 30 R Δt Z National economy* 0.770 0.00647 -0.0285 2.148 0.00398 0.0004 -4.239 0.01062 -0.6043 2.896 0.00184 0.0185 1.422 0.00356 0.0089 0.523 0.00655 -0.0538 -0.185 0.01143 -0.0383 Manufacturing 0.946 0.00442 – 1.546 0.00198 – 1.682 0.00848 – O L L+M 1.513 1.290 2.390 0.747 1.547 1.649 0.093 0.113 0.197 -0.846 0.274 0.355 0.102 0.074 0.135 0.225 -0.833 0.312 0.383 0.121 0.086 – – – -0.056 0.086 1.183 -0.024 0.130 1.197 TECHNICAL PROGRESS AND ITS FACTORS IN RUSSIA’S ECONOMY 1961–1970 1971–1980 1981–1990 1999–2008 1.268 1.520 1.805 0.217 0.112 0.013 0.366 0.047 2.360 0.912 0.460 -0.235 0.00078 0.00167 0.00349 0.00976 – – – – – – – – 0.273 0.164 -0.224 0.060 0.343 0.201 -0.201 0.072 * Calculated from aggregated data. Δt = gT FKGKR. Source: see the Appendix. Passing over to the question of returns to growth factors, it is expedient to focus attention on the most important of them from the viewpoint of economic growth, shown in Table 18. Table 18. Returns to fundamental growth factors in the Russian economy (in dollars of year 2000) Unit of measurement K USD/USD % H USD/schooling year R USD 103/ person National economy Manufacturing 1960 1970 1980 1990 1998 2008 1960 1970 1980 1990 1998 2008 15.2 10.9 8.2 7.2 5.2 8.7 212 425 600 385 733 340 30.7 16.1 79 4.10 8.12 8.71 7.90 3.40 4.59 3.31 153 16.1 20.4 15.8 32.0 243 416 218 455 7.74 11.21 14.05 5.30 7.06 Source: calculated from the Appendix. Evaluating these data it can be noticed that between 1960 and 2008 the return to capital (K) in Russia diminished by two-fifths at a macro level, but increased 1.04 times in manufacturing. At the same time the returns to education rose 3.5 and 5.8 times respectively, although their dynamic increase was temporarily interrupted by the transformational recession of the 1990s. The returns to research and development, the other component of human capital, became 1.1 times larger in the national economy and 2.1 times in manufacturing. Between 1990 and 1998 the latter indicator showed a particularly sharp decline in manufacturing, the consequences of which had not been surmounted by the end of the study period, similarly to the total economy. 5. Structural Change and the Role of FDI Technological development is usually accompanied by profound changes of a structural character as the economy takes the modernisation road in order to 31 Economic Annals, Volume LV, No. 186 / July – September 2010 raise its efficiency and competitiveness. In Russia there were several waves of modernisation, such as after the repeal of serfdom in 1861, or Stalin’s socialist industrialisation during the 1930s. Available data show that in the period between 1990 and 2008 the share of agriculture in Russia’s gross value added contracted by almost an eighth, falling to a level below 5%. However in the total number of persons employed it decreased by only about 2% to the level below one-tenth, which is still quite a formidable indicator. At the same time the share of industry in the production of value added declined from two-fifths to one-third, and in the employed workforce from a third to a fifth. Although manufacturing managed to preserve its predominance within Russian industry, the latter’s extractive sectors strengthened their position, especially in production. The relative weight of services increased from less than a half to two-thirds in production and from three-fifths to around fivesevenths in employment. Thus Russia’s economy became more service-oriented, in accordance with global trends (see Table 19). Table 19. Russia’s value added and employment by economic activity (in %; national economy = 100.0) Value added at current prices* Year Of which: Agri- Industculture ry Mining Manu- Utilifactuties** ring A-B C-E C D E 1990 16.7 38.1 3.7 1991 14.3 39.0 3.5 1992 7.4 35.1 6.8 24.2 Employment Services F-Q 10.2 45.2 27.1 8.4 25.8 2.5 Of which: IndustAgriry Mining Manu- Utiliculture factuties** ring C-E C D E 25.4 1.4 Services F-Q 10.9 28.4 1.6 60.7 46.7 11.1 28.5 1.7 25.4 1.4 60.4 57.5 12.0 27.8 1.7 24.5 1.6 60.2 60.1 1993 8.3 35.7 6.9 27.7 1.1 56.0 12.1 27.8 1.7 24.4 1.7 1994 6.5 34.2 5.2 21.2 7.8 59.3 12.6 25.9 1.7 22.4 1.8 61.5 1995 7.4 28.2 6.7 20.2 1.3 64.4 12.3 24.5 1.6 21.0 1.9 63.2 1996 7.3 29.8 6.6 16.4 6.8 62.9 12.0 23.5 1.7 19.7 2.1 64.5 1997 6.6 29.8 6.3 15.7 7.8 63.6 11.3 22.0 1.7 17.9 2.4 66.7 1998 5.8 30.0 5.2 14.6 10.2 64.2 10.7 21.3 1.6 17.1 2.6 68.0 62.9 1999 7.4 31.2 5.7 15.1 10.4 61.4 14.8 22.3 1.8 18.0 2.5 2000 6.6 31.7 7.1 16.0 8.6 61.7 14.6 23.5 2.0 18.9 2.6 61.9 2001 6.8 28.8 6.9 14.6 7.3 64.4 12.1 24.2 2.1 19.5 2.6 63.7 2002 6.7 28.2 6.8 17.6 3.8 65.1 11.5 24.5 1.8 19.9 2.8 64.0 2003 6.8 27.4 6.7 17.0 3.7 65.8 11.0 24.4 1.9 19.4 3.1 64.6 65.8 2004 6.1 31.5 9.6 18.1 3.8 62.4 10.3 23.9 1.8 19.1 3.0 2005 5.4 32.9 11.0 18.6 3.3 61.7 10.4 23.5 1.9 18.8 2.8 66.1 2006 5.0 32.1 10.7 18.1 3.3 62.9 10.2 23.4 1.8 18.6 3.0 66.4 2007 4.9 31.0 9.9 18.0 3.1 64.1 9.4 23.1 2.0 18.2 2.9 67.5 2008 4.8 29.5 9.2 17.4 2.9 65.7 9.0 22.2 2.0 17.1 3.1 68.8 32 TECHNICAL PROGRESS AND ITS FACTORS IN RUSSIA’S ECONOMY * Gross value added including Financial Intermediation Services Indirectly Measured (FISIM). ** Electricity, gas, and water supply. Calculated from: Poccийcкий cтaтиcтичecкий ежегодник, Poccия в цифрах, Национальные счета Росcии; National Accounts Statistics; International Yearbook of Industrial Statistics; Yearbook of Labour Statistics, various volumes. It is believed that one can speak of a resource-based economy if natural resources account for more than 10% of GDP or gross value added and 40% of exports (cf. Kalyuzhnova, 2008: 7). Because of its significant manufacturing industry Russia cannot be regarded as a purely resource-based economy, though its mining sector exceeded the 10% production limit in 2005 and 2006 (Table 19). On the other hand the share of fuels and mining products in Russian exports expanded from 57.4% in 1993 to 74.3% in 2008, whereas the share of manufactures contracted from 37.3% to 20.1% (calculated from WTO Statistics Database). The latter facts point to the danger of an excessive development of mining and raw material branches irreversibly transforming Russia, already significantly dependent on fuel and energy price fluctuations, into a resource segment of the world economy (see Gaidar, 2006; Simon Jr., 2010). Table 20. FDI flowed in Russia, 1990–2008 Period 1990–2008 1990–1998 1999–2008 National economy Manufacturing USD million, in current prices 219 147 15 533 203 614 57 565 5 461 52 104 Manufacturing in % age of national economy 26.3 35.2 25.6 Calculated from: UNCTAD, FDI/TNC database and national statistics. Structural changes in the Russian economy since the early 1990s have been facilitated by FDI inflows, becoming more important after 1998. Overall Russia attracted USD 219.1 billion of FDI in the period up to the end of 2008, more than a quarter of which flowed into manufacturing. The overwhelming majority of it entered the country in the post-default period (see Table 20). Theoretically direct capital imports can have a decisive role in economic growth, as an important carrier of technology transfer and a domestic disseminator of modern corporate governance, to which should be added the widespread external market connections of affiliated companies importing capital. However, in the case of Russia foreign capital is, as a rule, only fragmentarily present from the viewpoint 33 Economic Annals, Volume LV, No. 186 / July – September 2010 of the total economy, so that the various favourite effects attributed to it can find only limited expression (Csaba, 2006: 312; Erdős, 2006: 367; Weiner, 2004: 18). Table 21. Share of cumulative inward FDI in Russia’s fixed assets (at 2000 prices, in %) Sphere National economy Manufacturing 1990 0.002 0.008 1998 0.3 0.9 2008 3.4 6.7 Note. FDI data at current prices were deflated with the U.S. investment price index taken from the U.S. Department of Commerce, Bureau of Economic Analysis. Calculated from: see Table 20. Table 22. Elasticity of output by foreign and domestic capital in Russia (based on the Simon model) Sphere National economy Manufacturing K 0.800 0.573 1990 1998 2008 KD K KF KD K KF KD KF 0 0.800 0.858 0.003 0.855 0.887 0.030 0.857 0 0.573 0.706 0.006 0.700 0.795 0.053 0.742 Note. Fixed assets: K = total, K F = foreign, K D = domestic. Calculated from: see the Appendix. Although the share of cumulative FDI in the total capital stock went through a rapid increase between 1990 and 2008, by the end of period it had attained less than 5% in the national economy and less than 10% in manufacturing (Table 21). As for production effect, in the post-default period the elasticity of output by foreign capital rose 10 times at a macro and 8.8 times at a manufacturing level, but still remained far below the elasticity of domestic capital (Table 22). Foreign capital avoids economies with equilibrium problems and unstable currencies. An economy with stable prices and exchange rate is capable of successfully attracting FDI and other external investment sources and thus accelerating growth, as was shown by the Irish “miracle”. A strict compliance with contractual obligations is also an important condition, which unfortunately is frequently missing in Russia. In the longer run the inflow of foreign capital is not exclusively encouraged by providing various tax allowances, as its profits are much more favourably affected by an educated workforce which is widely available in Russia, and a developed infrastructure, which in this case is problematic. Moreover in the leading economies the development of infrastructure is increasingly handled as an important condition of improving industrial efficiency 34 TECHNICAL PROGRESS AND ITS FACTORS IN RUSSIA’S ECONOMY and one of the decisive determinants of industrial competitiveness (cf. Erdős, 2006: 70-72, 284). 6. Conclusions Technical progress is an important factor in Russia as one of the leading powers in the world economy and the politics of the 21st century. Interpreting this phenomenon as total factor productivity, we can state that in the analysed period, from the early 1960s to the current global crisis, it made the second largest average contribution to economic growth after fixed capital, both in the national economy and manufacturing. It can also be ascertained that it was embodied technical progress which determined productivity rise in both spheres. Our research has also shown that the most important factor of technical progress in Russia has been its immobile component at a macro and its mobile component at the manufacturing level, while the creative component was third, except in manufacturing before the early 1970s. The role of mineral wealth represented by oil and gas resources was marginal in this context. 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U.S. Department of Commerce, Bureau of Economic Analysis. 38 TECHNICAL PROGRESS AND ITS FACTORS IN RUSSIA’S ECONOMY APPENDIX Legend to the tables YN = gross domestic product in billions of 2000 U.S. dollars, at purchasing power parity (PPP); YM = manufacturing value added in billions of 2000 U.S. dollars, at PPP; KN = average annual gross fixed capital in the national economy, including dwellings, in billions of 2000 U.S. dollars, at PPP; KM = average annual gross fixed capital in manufacturing in billions of 2000 U.S. dollars, at PPP; LN = average annual number of persons employed in the national economy (in millions); LM = average annual number of persons employed in manufacturing (in millions); H/L = number of schooling years per capita (for population aged 15 and over); R Nt–2 = f ull-time equivalent (FTE) number of all scientists and engineers engaged in R&D (considering a two-year lag, in thousands); R Mt–2 = FTE number of manufacturing scientists and engineers engaged in R&D (considering a two-year lag, in thousands); Z = arable land (in million hectares); O t–1 = crude oil and natural gas resources (at the end of the year preceding the reference year, in million tonnes of oil equivalent); N = mid-year population (in millions); w = monthly wages in manufacturing (in 2000 U.S. dollars, at PPP); FDIN = a nnual flow of foreign direct investment (FDI) in the national economy in millions of current U.S. dollars; FDIM = annual flow of FDI in manufacturing in millions of current U.S. dollars; FKN Σ = cumulative stock of FDI in the national economy in millions of 2000 U.S. dollars; FKM Σ = cumulative stock of FDI in manufacturing in millions of 2000 U.S. dollars. 39 Economic Annals, Volume LV, No. 186 / July – September 2010 Russia: Main macroeconomic and manufacturing indicators Year YN KN LN R Nt–2 H/L Z YM National economy 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 671.6 701.6 736.0 742.2 796.4 832.7 891.3 947.8 1008.4 1028.3 1111.0 1161.6 1185.6 1290.5 1334.8 1381.3 1425.6 1486.1 1534.6 1548.6 1578.8 1602.9 1661.6 1726.1 1760.2 1802.6 1877.2 1915.6 1982.1 2024.5 2015.8 1915.0 1637.3 1491.6 1302.2 1248.8 1203.8 1220.7 1156.0 1230.0 1353.0 1422.0 1488.8 1597.5 1712.5 1822.1 1962.4 2121.4 2240.2 592.5 644.9 699.6 759.6 825.6 896.3 964.0 1029.5 1101.6 1182.3 1273.9 1375.7 1485.8 1604.7 1731.6 1867.5 2007.3 2148.5 2300.1 2459.7 2624.6 2799.1 2984.0 3180.8 3380.8 3575.1 3769.7 3963.7 4164.1 4374.0 4570.5 4740.4 4867.8 4938.2 4955.2 4952.9 4952.9 4940.4 4920.4 4913.2 4927.4 4962.4 5009.3 5067.1 5140.5 5230.1 5342.8 5490.0 5665.8 54.026 55.083 56.162 57.261 58.382 59.524 60.342 61.170 62.010 62.862 63.725 64.586 65.459 66.343 67.239 68.148 69.140 70.146 71.168 72,204 73.250 73.686 73.867 74.058 74.248 74.491 74.792 74.942 75.093 75.168 75.325 73.848 72.071 70.852 68.484 66.409 65.950 64.693 63.812 63.963 64.517 64.980 65.574 65.979 66.407 66.792 67.174 67.701 68.232 165.970 181.220 206.951 236.856 308.850 331.684 357.414 389.790 416.372 450.197 480.443 513.926 537.697 586.517 616.848 648.116 685.349 714.402 735.617 748.312 768.078 782.221 798.920 820.817 831.296 838.794 854.386 868.273 873.385 880.372 879.349 879.008 878.500 714.900 662.500 644.900 621.790 610.357 562.070 532.469 492.494 497.031 506.420 505.778 491.944 487.477 477.647 464.577 464.357 KM LM 8.91 9.02 9.13 9.24 9.35 9.46 9.60 9.74 9.89 10.04 10.19 10.22 10.25 10.28 10.31 10.34 10.33 10.32 10.31 10.30 10.29 10.40 10.51 10.63 10.75 10.89 11.05 11.22 11.39 11.56 11.71 11.52 11.36 11.20 11.05 10.90 10.96 11.02 11.08 11.14 11.18 11.24 11.30 11.36 11.42 11.48 11.54 11.60 11.66 132.2 133.4 134.8 134.9 134.4 134.3 134.1 134.0 133.8 133.8 133.8 133.7 133.7 133.5 134.2 134.0 134.1 134.1 134.2 134.3 134.3 134.3 134.3 134.2 134.3 134.2 134.2 134.2 133.8 132.8 132.3 133.7 133.7 131.3 130.4 129.4 128.0 129.4 128.0 126.8 126.2 125.7 125.3 124.4 124.0 123.6 123.4 123.4 123.4 63.71 69.60 76.20 83.09 89.54 96.43 105.2 115.8 125.4 134.0 145.7 157.3 166.9 179.4 193.9 209.4 219.8 230.3 242.9 249.3 257.6 265.3 273.1 283.4 296.3 306.7 322.0 334.2 346.4 353.3 354.7 308.0 261.2 223.1 160.7 154.0 131.6 121.3 112.4 129.3 143.5 146.4 147.9 163.2 180.4 194.2 210.2 230.2 237.5 59.58 66.38 74.57 84.34 94.10 103.9 113.3 122.0 131.2 142.6 156.8 170.2 184.2 200.6 217.9 236.0 255.6 276.0 297.1 318.1 339.9 362.9 385.9 408.5 431.5 456.4 480.5 503.1 524.4 547.7 571.2 597.5 623.5 638.1 640.1 636.7 632.6 626.8 620.8 616.5 615.2 619.3 626.5 632.6 647.2 671.6 698.1 730.8 770.6 13.745 14.374 14.929 15.357 15.766 16.522 17.030 17.518 17.971 18.367 18.566 18.759 18.985 19.184 19.467 19.769 20.136 20.153 20.294 20.636 20.911 20.911 21.094 21.103 21.110 21.147 21.145 21.030 20.473 19.850 19.146 18.794 17.688 17.317 15.335 13.946 13.013 11.577 10.937 11.528 12.178 12.656 13.067 12.820 12.674 12.534 12.472 12.324 11.663 PPP conversion rates. USD 1 = Rbl. 5.40 for GDP, 7.23 for MVA, and 4.10 for fixed assets. 40 R Mt–2 Manufacturing 48.891 60.782 75.408 87.792 116.019 138.809 148.999 159.755 166.607 183.768 197.410 211.894 227.652 248.261 270.782 287.816 306.606 313.337 321.028 328.209 335.756 343.082 352.159 359.792 366.713 374.115 382.217 390.653 395.195 395.980 394.033 390.341 386.594 311.748 286.266 276.112 263.860 266.280 236.968 214.431 190.168 194.754 204.067 200.587 193.008 183.477 181.880 175.146 175.063 TECHNICAL PROGRESS AND ITS FACTORS IN RUSSIA’S ECONOMY Russia: Supplementary data Year O t–1 N w* FDI N FDI M FKN Σ FKM Σ 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 11419 11818 12230 12657 13099 13656 14029 14519 15027 15999 17000 15598 16933 18379 19564 20856 22458 24002 25035 26879 28077 29417 31758 32347 33010 33719 35002 36378 37829 39325 40893 42535 44256 46060 48039 48039 48039 48039 47628 47628 47687 45105 46670 46670 46670 46655 51104 51104 51772 119.906 121.469 122.971 124.377 125.645 126.749 127.675 128.441 129.103 129.734 130.392 131.095 131.837 132.614 133.415 134.233 135.070 135.936 136.825 137.733 138.655 139.577 140.496 141.434 142.420 143.469 144.593 145.763 146.893 147.871 148.615 149.091 149.323 149.359 149.273 149.124 148.926 148.667 148.339 147.927 147.423 146.828 146.159 145.438 144.696 143.953 143.221 142.499 141.780 397.85 406.45 409.68 418.10 426.70 439.43 456.63 482.08 520.61 546.24 567.56 588.89 610.22 631.54 674.19 704.12 729.57 742.47 759.50 776.52 802.15 800.18 810.57 822.76 843.19 871.68 872.22 880.47 937.99 1008.06 1093.19 1055.56 687.81 613.08 522.04 404.48 441.04 471.86 412.19 341.94 424.91 478.49 565.77 627.96 698.21 755.70 834.22 966.53 1055.54 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 100 100 1161 1211 690 2066 2579 4865 2761 3309 2714 2748 3461 7958 15444 12886 29701 55073 70320 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 40 40 465 469 263 763 918 1609 894 1025 831 1222 731 2307 4951 8735 10965 10599 10738 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 107 212 1431 2685 3389 5469 8067 12970 15772 19123 21837 24551 27944 35627 50035 61601 87350 134558 194369 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 43 85 573 1059 1327 2095 3020 4641 5548 6586 7417 8624 9341 11568 16187 24027 33533 42618 51751 * USD 1 = Rbl. 5.58. Received: September 29, 2010 Accepted: October 27, 2010 41