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Streetwise Professor

April 26, 2010

It’s the Institutions, Stupid

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 1:26 pm

Sergei Guriev and Ekaterina Zhuravskaya of Moscow’s New Economic School have produced an excellent paper comparing Russia with South Korea.  The starting point of their analysis is the superficial similarity between South Korean economic growth performance in the 1980s-1990s, and Russia’s performance in the 1990s and 2000s (i.e., lagged about 11 years).  This similarity is sometimes touted as evidence that Russia is the next South Korea development miracle.

Not so fast, there, say Sergei and Katia.  There are huge differences between South Korea and Russia.  Notably, virtually 50 percent the latter’s growth is (per calculations by Guriev and Tysvinski cited in the paper)  is attributable to natural resources (notably oil), whereas none of Korea’s is.

More importantly, the authors emphasize that when evaluating future prospects for growth, it is necessary to take account of the staggering institutional gap between Russia and Korea.  By all measures, both contemporary, and comparing Russia today to South Korea in the late-1990s, Russia’s institutions are extremely weak relative to Korea’s, and this weakness is inimical to growth.  Sergei and Katia argue that, without a substantial improvement in Russia’s political and economic institutions, notably its protection of property rights, Russia has no chance at being a Eurasian Tiger.  No chance.

And here’s where their analysis is particularly pessimistic.  They emphasize the interaction between the resource rents that have accounted for huge share of Russia’s growth, and the prospect for developing growth-supporting, modernization-supporting institutions; specifically, they note that the resource curse undermines the development of robust market-supporting institutions.  They further note that, consistent with the predictions of a good portion of the resource curse literature, the energy and resource boom in Russia has led the elites to take measures to reinforce the status quo in order to protect their access to resource rents.  That is, the resource boom has coincided with a weakening of institutions, and the still-birth of any modernization efforts.  (The reinforcement of the power vertical and the erosion of federalism are the main examples they discuss.)

None of this should be a shock to SWP readers.  Guriev and Zhuravskaya are advancing arguments and evidence that I’ve been making for the past four years.

For those giddy with the success of a bond sale, or the nascent signs of a Russian economic recovery on the back of strong oil prices, the Guriev-Zhuravskaya analysis should be a bracing corrective.   The long term prospects for Russia’s development as anything other than a resource appendage, at the mercy of the economic prospects of the rest of the world (which determine the demand for the country’s resources), depend crucially on the development of strong institutions that constrain kleptocracy, corruption, expropriation, and rent seeking.  But, ironically, the dynamics of a resource-oriented polity are inimical to the development of those strong institutions.

This implies, as G-Z state,

that Russia’s long-term prospets are rather bleak. . . . Russia is very likely to embark on a slow-growth trajectory.  Even in the best-case scenario, it will not catch up with the advanced economies in the foreseeable future, and in the worst case, Russia will follow the fate of the Soviet Union.

Put differently, in SWP-ese: Russia: In economic purgatory for the foreseeable future.

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30 Comments »

  1. [...] This post was mentioned on Twitter by The Free Market. The Free Market said: #CFP #SKP Streetwise Professor » It's the Institutions, Stupid http://bit.ly/cUyPAg [...]

    Pingback by Tweets that mention Streetwise Professor » It’s the Institutions, Stupid -- Topsy.com — April 26, 2010 @ 4:00 pm

  2. Is anybody posting here stupid enough to think the Russian and SK economies are remotely comparable? Phoby might be, but that’s it.

    And the authors seem to think that Russian institutions were stronger in the late Yeltsin years than now, and that what was going on then was “modernization”. Whut loons!

    Tell ya what. Suppose Putvedev cut energy exports to a level sufficient to balance the current account, prohibited Western investment in the energy sector, diverted investment to the non-energy sector, and just let Russia’s energy export infrastructure degrade as other exports take up the slack. I expect SWP wouldn’t like that world either, though that’s the magnitude of the action it would take to break the political power of the Russian energy oligarchs as well as getting the rest of SWPs agenda installed.

    But it is a metaphysical certainty that Russia would then be the next South Korea, complete with the collapsing birth rate!

    And

    Comment by rkka — April 26, 2010 @ 6:08 pm

  3. I suggest you take up that question with Sergei and Ekaterina, who are definitely NOT stupid. Before doing that, and getting your ass kicked permanently around your shoulders (if it isn’t there already), I strongly suggest that you read what they wrote, and particularly their motivation for making the comparison. Hint: it didn’t begin with them.

    Seriously. I remember the first time I saw Katia present a paper at the ISNIE meetings in Iceland in 2007. I didn’t know her, but I was just blown away by her presentation and her smarts. I’ve gotten to know her pretty well since, and she’s only risen in my estimation. And I’ve gotten to know Sergei too, and he is her equal in every way.

    So go ahead! Debate them! I’ll send flowers and a donation to your favorite charity when it’s over.

    The ProfessorComment by The Professor — April 26, 2010 @ 6:16 pm

  4. I’ve scanned through the article and will include in my next Sublime News. These are a few of my cursory impressions:

    1) I agree with rkka that comparing Russia to S. Korea is highly questionable, to be charitable. One has a densely-packed population living close to ocean transport routes giving cheap access to markets in the US (consumer goods), Japan, and China (machinery). The other country has a cold landmass with sparse population, is essentially land-locked, and high transportation costs; it also has a lot of energy resources. These differences mean that Russia will never become a major industrial export hub no matter its institutions, nor should it try to do so.

    2) The calculation that the rise in oil prices accounts for around half of Russia’s GDP growth. But real oil output has been on a rough plateau (tilted slightly upwards) since 2005. Now you could argue that hydrocarbons revenues gave a boost to consumption. But how is that possible when the state was locking up most of this in its foreign currency reserves? And why did a country like Belarus, experience higher growth than Russia, despite not having any significant energy reserves of its own?

    3) Then there’s the very heavy reliance on the World Bank’s governance indicators, and the assumption that poor institutions and corruption hinder growth and modernization. I would be interested to hear, then, how Italy managed to surpass Britain’s GDP in the late 1980′s, just a few years before a series of corruption trials indicted hundreds of senior politicians and businessmen of corruption (these trials soon petered out under political pressure). Now Italy, granted, does not have a very modern economy by North European standards, and it has become rather lethargic in the past 2 decades. But it is unquestionably a developed, high-income nation.

    There’s more points I could make but these are it for now.

    Comment by Sublime Oblivion — April 26, 2010 @ 6:30 pm

  5. * “and the assumption that poor institutions and corruption hinder growth and modernization”

    That was badly put. They do hinder it, the question is – to what extent?

    Comment by Sublime Oblivion — April 26, 2010 @ 6:31 pm

  6. Um, SWP? I’m agreeing with ‘em that there is no sense in comparing the Russian and SK economies.

    And usually, modernization isn’t associated with massive capital flight/brain drain.

    Comment by rkka — April 26, 2010 @ 7:20 pm

  7. One more thing. One the papers Sergey and Katya reference (Shleifer et al) argue that for the purposes of modernization institutions are very secondary to human capital. This reinforces the argument that Russia’s development will be largely successful (ie during the next 10 years), but that unless it does eventually sort out its ineffective institutions and corruption issues, it will then stall and go into stagnation.

    I also don’t buy the idea that Russia’s institutions will necessarily stagnate. The siloviki rent-seekers haven’t been doing too well of late.

    Comment by Sublime Oblivion — April 26, 2010 @ 7:27 pm

  8. Truly great analysis, thanks for providing it. Especially liked this part:

    “Interestingly, the same Russian government discussed above has adopted a very ambitious and detailed plan for reform known as “Russian Federation’s Development Strategy for 2000-2010.” This strategy, also known as “Gref’s Program,” was commissioned by then-President Putin from his incoming economy minister Herman Gref in 1999-2000 when the oil price was only a fraction of the price ten years later. Unfortunately, only a handful of the reforms were actually implemented, mostly during Putin’s first presidential term. Moreover, during Putin’s second presidential term, when oil prices reached historic highs, some of the reforms were reversed.”

    Comment by deith — April 26, 2010 @ 7:53 pm

  9. The Chaebol is one mighty democratic institution.

    Comment by So? — April 26, 2010 @ 10:08 pm

  10. As usual, we were way ahead of this curve:

    http://larussophobe.wordpress.com/2010/04/18/editorial-south-korea-vs-russia-duh-no-brainer/

    Comment by La Russophobe — April 26, 2010 @ 10:51 pm

  11. This was a fashionable idea in 2000-1 or so – UBS wrote a piece on “Russia’s Chaeblols”, with the idea that the Russian oligarch groups would be able to recycle natural resource rents efficiently in to value-added, non-commodity sectors, more efficiently than the nascent financial markets, which were still suffering from the post-default lack of trust. This was in principle the deal that Putin reached with the oligarchs, only to throw it out the window when Khodorkovskii raised a scandal about Severnaya Neft, and started to show too much independence in Parliament, especially in relation to taxation.

    I doubt it was ever really realistic as a strategy – the oligarchs have dabbled in downstream production (auto production, for instance) but not very seriously, and not very well. There is no rule that says that being good at appropriating natural resources makes you good at running manufacturers. The oligarchs can point to some success in private equity, but these have generally needed foreign partners or managers.

    I don’t think Putin and the siloviki were ever really up for a “Korean” solution in any case – it was just a patch to keep the oligarchs quiet while the siloviki were planning their own natural resources grab.

    Comment by Tom — April 27, 2010 @ 3:03 am

  12. Don’t forget that in South Korea labor market flexibility has been raised to such an extent that they’ve pretty much stopped having kids.

    http://www.oecd.org/dataoecd/38/58/39696376.pdf

    Their praise of SK’s labor market flexibility is a dead giveaway of the life they would like the Russian people to submit to: being worked to extinction.

    And people wonder why the politicians this sort supports do so atrociously in Russian elections.

    Comment by rkka — April 27, 2010 @ 5:17 am

  13. To be fair Korea is one of the most overpopulated countries on Earth, so their low fertility rates may well be a good thing.

    Comment by Sublime Oblivion — April 27, 2010 @ 8:10 am

  14. Korea is virtually indistinguishable from Russia in regard to fertility, both outside the top 175 nations on the planet:

    http://en.wikipedia.org/wiki/List_of_countries_and_territories_by_fertility_rate

    Each invididual Korean is FAR more productive than each Russian, and without natural resources or territory Korea’s GDP nearly matches Russia, while the country exports a vast array of compelling consumer products and Russian exports none.

    Comment by La Russophobe — April 27, 2010 @ 12:27 pm

  15. Phoby, Phoby, Phoby…

    It’s not really smart to use estimates made in 2006 when there is 2009-2010 data available.

    But then, if you were smart, you wouldn’t be Phoby.

    Comment by rkka — April 27, 2010 @ 1:19 pm

  16. Um, SWP? I’m agreeing with ‘em that there is no sense in comparing the Russian and SK economies.

    And usually, modernization isn’t associated with massive capital flight/brain drain.

    Comment by Simon — April 27, 2010 @ 2:06 pm

  17. RKKA:

    You do realize that is not our estimates but Wikipedia’s, right?

    If you think there is “data” produced by a proud KGB spy, then you need to be institutionalized. Hopefully, in a Russian institution.

    You mean that because the Kremlin would never lie, Russia is now “only” #150, not #200?? Wow! Great! Maybe by the end of the next century it can crack the top 100! Except that, oops, by then Russians will be extinct.

    You don’t have the intelligence God gave the lemon.

    Comment by La Russophobe — April 27, 2010 @ 3:05 pm

  18. Phoby, Phoby, Phoby…

    It’s not really smart to use estimates made in 2006 when there is 2009-2010 data available.

    But then, if you were smart, you wouldn’t be Phoby.

    Comment by Sarah — April 27, 2010 @ 4:38 pm

  19. Phoby, Phoby, Phoby….

    You stupidly cite them to support your stupid claims. Thus, you’re only discrediting yourself by running away from them nowthat I have pointed out how stupid you are to cite them.

    And tell me, who has better data on Russian statistics than the Russian statistical service and why?

    And as for your fantasy of Russians dying out (wipe the drool off your mug), all I will say is that Balts, Ukrainians, Germans, Italians, Japanese, South Koreans, and Poles will go first.

    Comment by rkka — April 27, 2010 @ 5:39 pm

  20. RKKA:

    Why do you sign your name “Sarah” and then “RKKA”?

    We’re not running away from our claim. It was “Korea is virtually indistinguishable from Russia in regard to fertility, both outside the top 175 nations on the planet.” You have not disproved it. You have shown no published ranking to indicate that Russia is signifantly inside the top 175 nations for fertility. We stand behind our claim.

    You are a liar, a cheat, a fraud, a coward and a piece of filth.

    Your suggestion that data produced by a Kremlin ruled by a proud KGB spy can be relied upon would offend the intelligence of a cheeseburger.

    Comment by La Russophobe — April 28, 2010 @ 2:17 pm

  21. @La Douchebag,
    Russia’s TFR = 1.56 in 2009, on upward trend (Rosstat)
    Korea’s TFR = 1.19 in 2008, in stagnation (World Bank)
    Quite a substantial difference, that.
    Furthermore, you do realize that Rosstat is the only organization with enough people and resources on the ground in Russia to gather reliable data on many different spheres? And if you think the Kremlin’s statistics are doctored, why the hell are you using them to describe Russia’s 7.9% fall in GDP in 2009?
    Finally, I’d be interested to see your reply to this post – http://trueslant.com/markadomanis/2010/04/27/hows-that-social-breakdown-coming-fellas/ . When exactly will Putin “scapegoat and depose Mr. Medvedev”, or organize his imminent “Stalinesque purge”?

    @Simon,
    “modernization isn’t associated with massive capital flight/brain drain”
    1) First, Russia has had mostly positive capital inflows for the past few years, and its brain drain largely stopped after the mid-2000′s. Second, this is flat out wrong. Many educated Koreans immigrated to the US when it was modernizing in the 1980′s and 1990′s.

    Comment by Sublime Oblivion — April 28, 2010 @ 3:53 pm

  22. SUBLIME PEDOPHILE:

    You are a cowardly little rat, aren’t you? You simply can’t face the actual point, so you have to try to change it, like a schoolboy caught with his greasy hand in the cookie jar. The point is Russia’s POSITION ON A LIST COMPARED TO OTHER NATIONS, AND KOREA’S POSITION ON THAT SAME LIST. NOTHING you have written offers ANY proof of ANYTHING other that that BOTH nations are AT THE BOTTOM of any such list.

    When we cite the Kremlin’s statistics, we say “even the Kremlin admits” it’s such-and-so bad, then we say “can you imagine how bad it really is”? There are many posts on our blog documenting the Kremlin’s lies. You ought to try reading something other than your own vomit.

    Meanwhile, your frenzy makes clear how humiliating these facts are for you, almost as humilating as when Paul Goble showed KREMLIN OFFICIALS THEMSELVES admitting their claimed population grown spurt would not last.

    Ouch!

    Comment by La Russophobe — April 28, 2010 @ 6:17 pm

  23. I don’t know where La Retard got the pedophile from.

    Saying Russia is “low” on a global list of fertility levels to “prove” that Russia is “bad” is utterly retarded, because the “winners” of such a list are shining beacons of prosperity and development such as Niger or Afghanistan.

    Now looking only at industrialized nations, which is the appropriate comparison, Russia is more or less in the middle of the pack – today, much like Canada (1.6). It is lower than the US, France, the UK, and Scandinavia (1.8-2.1); higher than the Med, Germany, and Japan/Korea (1.1-1.4).

    Comment by Sublime Oblivion — April 28, 2010 @ 7:09 pm

  24. Ssso, “Simon” is merely reposting previous posts. Someone is going to the trouble of setting up a blog to make these repetitive comments, as you will find when you click on their link.

    Perhaps SWP can look into what is going on.

    Comment by rkka — April 28, 2010 @ 7:42 pm

  25. SUBLIME PEDOPHILE:

    Please do tell us the reasonable location you got “Douchebag” from and we’ll gladly do the same for pedophile.

    You’re a raving mental case, and as such perfectly typical of the sole class of “people” willing to defend Putin’s Russia in public. Similar folks defended Hitler’s massacre of Russians in World War II.

    Comment by La Russophobe — April 28, 2010 @ 8:50 pm

  26. Douchebag, you still have to reply to Adomanis’ article I linked to. The more you screech about Russia’s impending collapse, the better it gets.

    Comment by Sublime Oblivion — April 28, 2010 @ 9:32 pm

  27. Phoby, Phoby, Phoby…

    The Russians know very well who their enemies are, chiefly the intellectual heirs of the Western Russophobes who killed ~40 million people in Europe alone, just between 1939 and 1945, by causing or facilitating the outbreak of the most horrific war ever.

    Folls like yourself, in other words.

    Comment by rkka — April 29, 2010 @ 6:27 am

  28. SUBLIME PEDOPHILE:

    Are you aware that there are ZERO (that’s right, ZERO) sources cited in the article you link to? You may as well ask us to respond to the braying of an actual jackass. Do you think “sniff a lot of glue” is the mark of an impressive intellectual?

    Respectfully, we disagree. Why don’t you go sniff some more glue?

    Comment by La Russophobe — April 29, 2010 @ 7:08 pm

  29. Phoby, Phoby, Phoby…

    Mark’s article hardly needs sources. One must merely note the non-congruence between long-standing predictions of the imminent collapse of “the Power Vertical” over the years and reality.

    I know that last concept, reality, presents some difficulty for you. You “Triumph of the Will” types are all the same.

    Comment by rkka — April 29, 2010 @ 7:55 pm

  30. La Reprobate,

    1) Here’s the full quote from what you said at the article Adomanis links to:

    So let me see if I understand: Peter LaVelle, an employee of the Kremlin, thinks the Kremlin is doing a really good job managing its troubles, for which it was well prepared. And he believes that his views are reasonable and unbiased, while those who critize the Kremlin are carried away with prejudice.

    Uh, OK. We’ve heard that silly song and dance before, all through the collapse of the USSR. We heard how well the USSR was doing right up until the moment it was slam-dunked into the ashcan of history. And now, the likes of Mr. LaVelle wants to do it all over again. What mind-bogglingly inane drivel!

    Meanwhile, Putin is alreading laying the table to scapegoat and depose Mr. Medvedev, likely the precurser to a Stalinesque purge.

    You’ve predicted the last 100 or so of the last zero Russian collapses.

    You are being called to account for your lies or mistakes, just as you (try to) call “Russophile cockroaches” to account / slander them.

    Comment by Sublime Oblivion — April 30, 2010 @ 12:52 am

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