How Russia Could Be More Productive

The way out of the economic slowdown is a more effective use of the country’s resources—not just more resources.

November 2013 | David Solomon

Russia's economy has been growing rapidly over the past decade, with per capita GDP doubling over this period. Labor productivity remains low, but improvements have been promising. In five sectors—steel, retail, retail banking, electric power, and residential construction—productivity stands now on average at 26 percent of US levels in 2007.

Last time around, Russia experienced a dramatic economic turnaround: GDP grew at an average annual rate of 7 percent between 1998 and 2006, vaulting the country to 53rd (from 72nd) in the world rankings of wealth. Wages increased strongly as well, with disposable income rising 26 percent a year in nominal terms.

An increase in the size of Russia’s workforce, which accounted for almost one-third of the growth in real per capita GDP over the past decade, was going into reverse. In fact, Russia’s labor force could shrink by as many as ten million people by 2020. Commodities collectively represented around 20 percent of Russia’s GDP in recent years. Now Russia must grow by making better use of labor and capital resources—in short, higher productivity.

To make another leap in productivity and economic performance, Russia must tackle deep structural challenges, such as boosting its competitive intensity, making nuts-and-bolts improvements in operations and business processes, simplifying and clarifying regulations (including those for urban planning and permissions), and allocating financial capital more efficiently. There’s also a human dimension: raising productivity will require a more skilled and mobile workforce.

But Russia has some advantages. It can grow robustly without the need for rapid urbanization and social transformation—needs that are so acute in other emerging markets, notably China and India, countries whose productivity lags behind Russia’s significantly. And there’s a silver lining to Russia’s massive investment requirements: as demand for capital outstrips domestic supply, competition for foreign funds will probably make it necessary to speed up the implementation of Russia’s productivity agenda. Finally, the country’s government, which must play a critical role, has a powerful incentive to move quickly. In recent years, oil-related taxes represented a third to half of federal revenues. If these receipts shrink, Russia will need new ones. Broad-based, productivity-led growth, while far from easy to realize, is an achievable way to create new revenue sources while improving the lives of Russia’s people.

Labor Mobility

Russia can achieve its potential only if it promotes labor mobility among geographic regions and industry sectors. Historically, rapid per capita GDP growth has almost invariably been accompanied by such a shift in employment—first, from agriculture to manufacturing and, more recently, from manufacturing to financial, business, and trade services. In Russia, however, housing, infrastructure, legal, and cultural barriers hinder labor mobility.

Russia’s federal and local governments, as well as its businesses, can facilitate the reallocation of labor by focusing on regional economic-development initiatives that create new jobs. Enhanced job-placement services and improved social programs will also help the country’s workers become more mobile.

The restructuring of Europe’s steel and automotive industries during the past two decades provides some guidance. From 1986 to 1996, 12 EU countries decreased employment in the steel sector by 200,000 people, a number roughly equivalent to the sector’s excess employment in Russia. Likewise, during the 1990s a shift in automotive production to lower-cost countries led Volkswagen to shed 20 percent of the employees at its headquarters, in Wolfsburg, Germany. Virtually overnight, unemployment there soared to 18 percent. Five years later, thanks to a joint venture between the company and the municipal government, more than 11,000 new jobs had been created and the city’s unemployment rate was 50 percent lower.

Russia’s economy has made enormous strides over the past decade, but the forces behind its recent growth are weakening. By boosting productivity in the years ahead, the country can make its economy more competitive and improve the lives of its people.

 

Executive Editor

Ms Anna Sullivan

Ms Anna Sullivan