Enhancing Russia’s Competitiveness and Innovative Capacity
Editors: Raj M. Desai and Itzhak Goldberg
April 2007
The Russian economy has been growing at a nominal rate of 6 percent annually for the past several years. Nonetheless, the Russian government, concerned about the sustainability of this economic performance, has sought to promote more diversified and broader economic growth outside the natural resource sectors and promote a knowledge-based economy. Economic diversification covers a wide number of issues and involves many challenges, including: incentives, entrepreneurship, foreign investment, regional development, physical infrastructure and reduced natural resource dependence. This book, more narrowly conceived, quantifies and benchmarks the relative strengths of Russian manufacturing and identifies the opportunities to increase its productivity and competitiveness.
Russia's 2006–08 Mid-term Program, approved in early 2006, addresses many of the country’s most important development challenges. It emphasizes policy directions aimed at unleashing an “innovation economy”, including a greater State commitment to research and development, better protection and enforcement of intellectual property rights, the formation of IT parks, and setting up state venture funds. However, the program includes some controversial areas of economic policy that have yielded mixed results in other parts of the world. In particular, a “new industrial policy” aims to stimulate diversification and absorption via direct support to and intervention in particular sectors and firms.
1. Introduction
The Russian economy has been growing at 6 percent a year over the last five years. But there are concerns that this pace may have been supported largely by non-recurring events—years of labor shedding, devaluating after the 1998–99 crisis, and rising if volatile oil and gas revenues. The oil and gas sector accounts for less than 1 percent of Russian employment but about one-fifth of economic output and almost half of exports. Although productivity in the manufacturing sector has been rising, it has not kept pace with rising real wages in recent years, a trend associated with the appreciation of the ruble, which limits the international competitiveness of the Russian manufacturing.
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2. Productivity
In the 15 years since the Soviet Union’s collapse and the start of its economic transition, the institutions and structure of the Russian economy have greatly changed. Although much can be said about the inconsistency of the transformation and the incompleteness of many structural reforms, there is little doubt that Russia has moved from a centrally planned economy to a genuine market economy. All three main goals of economic reform initiated 15 years ago have been largely achieved. Prices are liberalized. Privatization is more or less complete. And the economy is now at least as open to international competition as many other market economies.
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3. Fostering Knowledge Absorption in Russian Firms through Competitive Pressure
The Russian Federation devotes considerable resources and manpower to research and development (R&D), yet the Russian economy lags behind other large OECD and middle-income economies in R&D-based outputs. In the face of the challenges for reforming the national system of innovation, microeconomic evidence shows that firms facing stiffer competitive pressures also innovate more—and that firm-level R&D has a strong, positive, and significant association with technological and organizational innovation and absorption. Governmental initiatives to promote innovation do not appear to recognize the significant role of competitive pressure in fostering innovation and absorption.
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4. Upgrading Skills
Russia, even with its highly educated workforce, faces growing shortages of skills in industry. In the transition to a market economy, the Russian workforce underwent a wrenching reallocation of labor across industries and occupations.46 And many specialized and technical skills imparted under central planning were no longer demanded by industry. Mismatches in the labor market became widespread, with sharp shortages of some types of skilled workers coexisting with excess supplies of others. The formal education system and the specialized vocational and technical training institutions in particular were poorly prepared to operate under these new market conditions and to supply the new skills required by the market. Employers who once hoarded labor are now reporting skill shortages as a major production constraint. And some are upgrading the skills of their existing workers through various training programs.
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5. Improving the Investment Climate
The investment climate—the government policies and practices that influence the opportunities and incentives for firms to expand—also contributes to the productivity and growth of the Russian economy. Following the financial crisis of 1998–99, favorable macroeconomic conditions, combined with major regulatory reforms to the business environment in 2000–02, have propelled Russia’s economic expansion.
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