Streetwise Professor

January 13, 2011

Reinforcing Failure

Filed under: Economics,Politics,Russia — The Professor @ 10:49 am

According to Stratfor, Vladimir Putin has announced plans to create 200,000 new jobs in monogorods (h/t R):

Russia plans to create more than 200,000 jobs in single-industry towns by 2015, Russian Prime Minister Vladimir Putin said, RIA Novosti* reported Jan. 12. The additional jobs would reduce the average level of registered unemployment in those towns from the current figure of 4.5 percent to 2 percent in 2015, Putin said. Moscow is developing comprehensive investment plans to modernize single-industry towns, including building industrial parks and infrastructure for small and high-tech business, Putin added.

Note the assertion that unemployment in the towns is supposedly 4.5 percent.  That’s pretty low, by any standard, including recent Russian standards.  If the economic situation in the monogorods is so acute to justify a massive investment program, the real unemployment rate can’t be 4.5 percent.   This number is likely analogous to the United States U3 unemployment statistic, which counts only people working or actively looking for work.  In depressed market conditions, other measures, like U6 which includes discouraged workers who have stopped looking for work, marginally attached workers, and part time workers who would like to work full time.  It would be interesting to know what the Russian analog to U6 would be, and in particular what the analog to U6 would be in monogorods.  It is likely that there are hosts of people who realize that looking for work is an exercise in futility.

There is a larger issue here, though.  That is the wisdom of injecting large amounts of money into the monogorods.  These single-industry towns were mainly Soviet creations, the results of misguided, not to say bizarre, social and economic engineering projects.  They are isolated.  Their workforces are often relatively old with out-of-date skills.  The costs of transportation to and from these places is often extreme.  The technology of the industrial plant is more suited for museum display than actual use.  In many cases, the industries themselves are dead or dying (or killing).

All this means that the prospects for rejuvenating these industries, and the associated towns, are bleak.  Even overlooking the fact that in Russia a healthy fraction of the money directed to these towns will never reach the ostensibly intended beneficiaries, there is no reason to believe that modern day central investment planning will be any more sensible than Soviet-era planning.  Moreover, the fundamental obstacles–geographic isolation, poor infrastructure and the associated high transportation costs, lack of scale, lack of a skilled workforce–that have condemned these cities to their current desperate straits will depress the returns on the capital the state directs to them: after all, if the potential returns were high, why wouldn’t private capital have flowed there?  (Perhaps you could argue that the hostile climate for private investment is a deterrent.  If so, that’s hardly an endorsement for the current system.)

All industrialized nations, including the US and UK, have faced wrenching problems in their industrial belts.  Just go to Detroit or Upstate New York or Birmingham or myriad other places in what were once the industrial heartlands of these countries to witness some of the problems.  Labor mobility and economic dynamism have mitigated these problems in western countries.  (Mitigated, not eliminated.)  In the US, workers have moved from the Rust Belt to the Sun Belt, and from manufacturing jobs to employment in services.  For many, the transition has been difficult, to say the least.

Government policies to encourage investment in declining areas has been notably unsuccessful.  There are no easy policy answers to the problem of declining industries.

Russia’s difficulties make those of America’s Detroits pale in comparison.  The monogorods are more isolated.  Capital and especially labor are far less mobile in Russia.  In the US, people could move from relatively expensive areas to relatively inexpensive ones (usually with better weather, to boot).  In Russia, in contrast, the more economically vibrant areas, especially Moscow, are extremely expensive.  The Russian economy is less dynamic and flexible.  All of these factors make it more difficult for labor markets to facilitate the transition of workers in monogorod towns to jobs in other locations, or to jobs in their current cities but in other industries/occupations.

Monogorods are a potential political problem, as the pen throwing dust-up in Pulkovo in 2009 demonstrated.  The rigidities in the Russian economic system mean that the monogorod problem is not going to take care of itself anytime soon.  That rigidity, plus the fact that many monogorods might as well be on the back side of the moon, mean that even grandiose state plans are doomed to failure.  But politically, Putin has to try.  Reinforcing Soviet era failure appears to him to be preferable to surrender.

* I wasn’t able to find the story on RIA Novosti’s English language web site.

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  1. I must have missed the part in the article where it says Putin’s intent is to reinforce failure. Oh, sure; I know he never specifically said – or would – that such was his intention, but that seems to be the direction you have run with the ball. Why? I’m curious. After all, it spells out, “developing comprehensive investment plans to modernize single-industry towns, including building industrial parks and infrastructure for small and high-tech business”. I’ll have to further assume, although I think I’m on safe ground, that your headline suggests Putin’s intent is to just dump money into the same industry that has kept the monogorod(s) staggering along for lo these many years. But why would you think that? The selection you quoted specifically says the intent is to modernize. Build industrial parks (which, everywhere else, spell diversified applications) and infrastructure for small and high-tech business. It’s quite clear that there are no plans to keep the truck-tire assembly line (or whatever) running by chucking money at it.

    Naturally, some of that will be feelgood politico-bafflegab, and you’d be right to suggest it was the case. But I’d think any effort to change things would be welcome. Would you prefer Russia’s leadership did nothing? I don’t understand why every effort to modernize is greeted with hoots of derision before it even gets out of the planning stage. Don’t you know negative reinforcement has the lowest success rate of all behavior modifications? Or was that intentional, and you prefer Russia does nothing to improve itself so it can continue to be the butt of your jokes?

    Might not high-speed rail lines link these communities? Russia is just getting started in the high-speed rail business, but it shows promise, and if they can build high-speed rail lines through some of the most unforgiving terrain (paralleling the road through the mountains in Sochi, for the Olympics) in Russia, surely straightforward path-of-least-resistance lines between outlying towns would be less of a challenge.

    I quite agree the monogorod “problem is not going to take care of itself”. This, then, is an iniative to take care of the problem that will not resolve itself. It does not mention pouring money into existing industry, but specifically mentions alternative investment. Where did you get the impression the government is committed to “reinforcing Soviet era failure”?

    Comment by Mark — January 13, 2011 @ 2:24 pm

  2. Facts are facts, and Putin is a total failure:

    You are entitled to your own opinion, but not your own facts.

    Comment by La Russophobe — January 13, 2011 @ 5:53 pm

  3. “These single-industry towns were mainly Soviet creations, the results of misguided, not to say bizarre, social and economic engineering projects.”

    Nonsense. The many were built east of Moscow before WWII and made excellent strategic sense at the time, providing the USSR with an industrial base well out of German reach.

    I know, I know, their establishment contradicts the precepts of your ideology, and therefore they should never have been established, despite the fact that partially through these monogorods the USSR was endowed with the military-economic sinews of war such as no Tsar had ever dreamed just before a war, the enemy objective of which was the extermination of Slavic “untermenschen”.

    “They are isolated.”

    Feature, not bug. See above.

    As to the rest, Mark sums it up pretty well.

    And Phoby is a loon.

    Comment by rkka — January 14, 2011 @ 4:19 am

  4. Let’s see. Millions of people are hopelessly stuck today in some hellholes in the middle of nowhere because it ostensibly made strategic sense 70 years ago. One could only wonder why a certain “rkka” would not want to be part of this “feature”.

    Comment by Ivan — January 14, 2011 @ 5:13 am

  5. As usual RKKA is a bit of an idiot, most of the Monograds were founded after the German invasion, not before, when the Russians desperately moved entire factories from western Russia and the Ukraine to the east.

    And as for Marks comments:

    Igor Bolotov of the Russian Ministry for Regional Development said on Wednesday that one trillion rubles (about $33.8 billion) would be required to modernize one hundred of the country’s so-called “monotowns,” small to mid-size Stalin-era establishments almost entirely dependent on a single industry. This dependency has made them particularly prone to the global economic crisis, threatening total economic collapse for the town if just one company goes under.

    As opposed to the trillion cited by Bolotov, the government’s 2010 allocation for the struggling provincial outposts is only 25 billion ($846 million) – a number that is itself far below the 100 billion ($3.38 billion) estimated last August for a federal development program.

    Additionally, investment programs have only been developed for 27 monotowns, 24 of which are currently being reworked. Only 8 of these programs, Bolotov noted, are focused on creating new industries, and only 11 include proposals for modernization. “But they do not solve the problem of single-industry,” he said.

    Comment by Andrew — January 14, 2011 @ 6:16 am

  6. I don’t understand why every effort to modernize is greeted with hoots of derision before it even gets out of the planning stage.

    Probably because in the case of most Russian government projects, the fact that there is a planning stage at all is usually enough to condemn the project to certain failure. Russia does not need to plan the rejuvenation of its struggling cities, it needs to stand the hell out of the way. By adding yet more governmental meddling to a problem largely caused and prolonged by idiotic government policies, Putin can reasonably be accused of reinforcing failure.

    Comment by Tim Newman — January 14, 2011 @ 7:01 am

  7. Mark–your ability to misread is beyond compare. Where did I ever say anything about intent? People (e.g., generals, to whose behavior the phrase is typically applied) do not usually consciously intend to reinforce failure. They usually have some other intention in mind, but their actions do not achieve their intent. Reinforcing failure is typically an unintended consequence, but it is not an uncommon one.

    The post argues that these measures are highly unlikely to achieve their intended benefit of saving the monogorods.

    In other words your assumptions are bunk, and you are on quicksand, not on safe ground.

    And what is it with high speed rail? This idea seems to have some sort of talismanic power over people. Mark, you clearly have zero understanding of the economics of transportation. Rail, like most other transport, is subject to substantial economies of density. It is very efficient on high-density routes, and grotesquely inefficient on low-density ones. It works in places like Japan and Western Europe where distances are short and population densities are high; its economics are dubious even in most of the US, let alone Russia. Rail routes to monogorods, high speed or slow, will inevitably be low density, and highly inefficient; not to mention the facts that (a) due to climactic and geographic considerations, construction and operating costs are higher in Russia, and (b) the colossal corruption in Russia inflates them even more. And high speed rail is for passenger transport, not freight, so it is largely immaterial in affecting the economics of operating manufacturing businesses in monogorods.

    That’s exactly what I meant when I was referring to high transportation costs. I thought it was so obvious that it was unnecessary to spell out the details. I was wrong about that, apparently.

    As for industrial parks, modernization, etc. Again, the economics are against it. The economic geography alone is an insuperable obstacle. Not to mention the other factors I mentioned in my post, specifically an aged work force that doesn’t have modern skills. The industrial US is littered with similar industrial parks intended to revitalize urban areas, but which did not achieve that intent. The obstacles in Russia are far greater.

    You also fail to grasp the basic issue: if the return to such modernization is high, why don’t private businesses make the requisite investments? Why is it up to the state? (Hint: any answer you may come up with is unlikely to put Russia in a good light.)

    To spell it out for you, the point of the post wasn’t about anybody’s intentions. It was about the economic realities upon which the best of intentions will run aground. The point is that structurally the monogorod problem is all but intractable, and that throwing money at it will only cement dysfunctional economic systems and relations. That’s reinforcing failure.

    This is not to mention the implications of the near simultaneous “Bluth” post. Consider Putin’s wonderful stated intentions to alleviate the problems of those burned out by the fires, in contrast to the delivered performance. What, pray tell, could possibly provide any confidence that the results will be any better in the howling wastes of Siberia, far from the eyes of anyone who could–if they had the courage to do so–say that the Emperor has no clothes?

    I presume that “Kremlin Stooge” is intended to be ironic, rather than literal. But I have my doubts.

    The ProfessorComment by The Professor — January 14, 2011 @ 9:45 am

  8. I was pretty sure I spelt out that Putin did not actually say he intended for the modernization effort to fail. Yes, I did, in the second sentence. What I thought I made clear was your implication that this is deliberate on Putin’s part – that he knows any such effort is doomed to failure, but is determined to go ahead with it anyway. Do you think this is the case? Just another scheme to make himself look like a great leader, no doubt, before an electorate that already broadly supports him.

    High-speed rail seems to have some sort of talismanic power over people because when it became reliably available throughout Europe, it murdered air travel, both commuter airlines and short-haul international. Most of the monogorods have at least a commuter airstrip. But you probably have a point about the distances involved, they may well be too great for efficiency.

    What, then, is the solution to the monogorod problem – relocating them all to major population centres, leaving huge distances between those? The perception of a problem as “all but intractable” isn’t likely to make it disappear, and doing nothing about it would obviously not be an option.

    Comment by Mark — January 14, 2011 @ 1:35 pm

  9. @Mark–nice try, but sorry. You didn’t say that Putin intended for the modernization to fail. But you did say–and you say again–that I stated that I “implied” that Putin so deliberately intended. False. That’s your (typically) defensive reading of what I wrote, which had no such implication. Period.

    You are still clueless about high speed rail. Yes, it works in Europe–for reasons I spelled out so that hopefully even you could get it. Which, perhaps you did (albeit grudgingly), i.e., “probably have a point.” Only quibble: there’s no “probably” about it.

    Sometimes, when you’re screwed, you’re screwed. A lesson of economics is to be leery of anything labeled a “solution.” These are usually snake oil. Life is trade-offs, and due to decisions made for decades, the trade-offs Russia faces re monogorods are pretty bleak. It would make more sense to take measures to free up labor and capital markets in ways that would make it easier for labor to move to higher value uses in other places, and perhaps, for (private) capital to flow into monogorods. Encouraging capital mobility is likely unrealistic, given the tenuousness of property and legal rights in Russia, the practice of raiding, etc. This is particularly true in monogorods, where predatory local officials and mafias are particularly active, and largely unchecked. Even in the US, and the UK, labor outflows from depressed areas was the primary way that markets responded to shocks that made particular industries uncompetitive/unprofitable. Of course, mobility is highly limited in Russia, for myriad reasons.

    The ProfessorComment by The Professor — January 14, 2011 @ 2:50 pm

  10. “As usual RKKA is a bit of an idiot,”

    Actually, Andrew is a bit of a snide idiot.

    “most of the Monograds were founded after the German invasion,”

    The “Poster Child” of the Monogorods, Pikalevo, had its cement plant built in the 1930s. The town then grew around it.

    “not before, when the Russians desperately moved entire factories from western Russia and the Ukraine to the east.”

    You badly misunderstand a complex process. Most of the factories that got moved would have been useless in their new locations if basic industries like steel production, electricity production, etc., had not been established behind the Urals in the previous decade, in the Stalinist industrialization drive.

    Comment by rkka — January 14, 2011 @ 3:58 pm

  11. Actually they knew exactly what they were doing. The idea was to retain fighting ability even after losing most of or even all of the European part of USSR. IRL, that’s almost exactly what happened.

    Comment by So? — January 14, 2011 @ 6:58 pm

  12. rkka: A couple of links. Basic conclusion: monogorods were not solely or even primarily the result of WWII relocation. The impetus for monogorods was the first two Five Year Plans. The most famous MG, Magnitogorsk, well predates WWII. Many MGs were part of or supported by the gulag system, e.g., Norilsk. After the war, the process continued, with the creation of places like Tolyatti/Autozavodsky and many nuclear- and defense-related facilities. It was a Soviet thing, with roots in Soviet ideology and economic thinking (to the extent that phrase is not an oxymoron). To wit, from the second link:

    Mark Urnov, a professor at the Higher School of Economics, said the monogorod model was incompatible with a free-market economy, and therefore many towns would have to be relocated.

    “The Soviet Union deliberately established an autarchic economy, one that didn’t depend on outside market forces,” Urnov said. “Towns were built not based on economic logic, but on the logic of war. That’s why they’re situated God-knows-where.”

    The ProfessorComment by The Professor — January 14, 2011 @ 9:18 pm

  13. rkka: I also suggest Hill and Gaddy, The Siberian Curse. It further documents that the monogorod phenomenon began in the 1920s-1930s, and was continued and even expanded in the 1960s-1970s. The entire Gulag system was part and parcel of the monogorod phenomenon. WWII relocations were a secondary factor. The phenomenon reflected Soviet economic concepts, with roots in Engels. It also had antecedents in Tsarist policy. Post-WWII, defense considerations were important. Industrial facilities and their associated urban areas were located in isolated regions for security purposes. The Hill-Gaddy analysis supports my statement about “misguided, not to say bizarre, social and economic engineering projects.”

    The ProfessorComment by The Professor — January 14, 2011 @ 10:11 pm

  14. Indeed. Their logic was strategic, not economic, and a good thing too. They certainly were not “…the results of misguided, not to say bizarre, social and economic engineering projects.” They ensured that Russia would win the war of racial extermination which Hitler intended against them, and which Chamberlain facilitated at Munich with malice aforethought.

    The Versailles Treaty was understood even by some of its authors as merely a twenty-year truce. Imperial Russia had failed, mostly because her armaments production and transportation capacity were badly inadequate to the demands of war of the 1914-1918 vintage. That was fixed by the late 1930s, thanks in no small part to the monogorods.

    Comment by rkka — January 15, 2011 @ 7:20 am

  15. You are just wrong, rkka. Do some actual research rather than reinforcing your own failure.

    The ProfessorComment by The Professor — January 15, 2011 @ 8:08 am

  16. Prove it.

    Comment by rkka — January 15, 2011 @ 8:46 am

  17. Well actually, AFAIK, the favored solution to the monotown problem is to emphasize the development of 20 big urban clusters.

    There needs to be more context for that quote. Which jobs in which monotowns precisely? It may well be that they refer to those are to be linked together to form more sustainable clusters of >1mn people.

    Comment by Sublime Oblivion — January 15, 2011 @ 11:49 am

  18. BTW, hi-speed rail in low density areas is today only uneconomic because aircraft fuel consumption and carbon emissions aren’t sufficiently taxed.

    In a limited world, HSR must be the future of mass transportation. China realizes this. Too bad that the US (outside California) doesn’t. 😉

    Comment by Sublime Oblivion — January 15, 2011 @ 12:37 pm

  19. And Florida. Florida has plans to build a high-speed rail network using the same trains as the Russian “Sapsan”, made by Siemens.

    But the professor is correct that high-speed rail is not used to move cargo, only passengers. Passengers won’t go where there’s no work and nothing to buy, and if they did, they can’t get it back home unless it’d fit with you in your seat. What I’m getting at is that high-speed rail would not be significant to trade in a positive way. Not in this situation.

    So, what can monogorods produce that is in high demand and can be economically transported? My wife’s home town (Dalnegorsk) would qualify as a monogorod; isolated, small, one-industry (mining). It was quite a healthy town under the Soviet Union, when it exported large quantities of boron. However, the withdrawal of two things put paid to that – the disappearance of the state stipend for town maintenance and upkeep (which resulted in its present rundown appearance, broken sidewalks, grass growing through the cracks in the tiles surrounding public monuments, etc…), and removal of the state-supplied trucking to the nearest railhead, some 200 km away.

    In this particular case, restoration of those quantities would restore the town to its former comfortable state. The mineral is still in demand, China buys a lot of it, and as with many minerals, demand is reliable owing to limited supply and speed of production. Presently, there’s not enough of a tax base of residents and businesses to maintain common property as was done under the state, and transportation costs strip away much of the profit realized from mineral sales. There’s no seaport, although it’s on the sea, and perhaps that would offer a valid transport option.

    In the case of mining towns and other natural-resource-based settlements, urban clustering doesn’t make sense that I can see. You’d still have to extract and transport the resource to market, you just wouldn’t have any people living there to do it. An improved road transport network, managed demand for the resource and economical transport sound reasonable to me.

    Comment by Mark — January 15, 2011 @ 4:55 pm

  20. Too bad that the US (outside California) doesn’t.

    Aye, because California’s high-speed rail system makes a lot of sense.

    This is an interesting comment on high-speed rail as well, which suggests it only works in high-density corridors. Russia has nothing of the sort.

    Comment by Tim Newman — January 16, 2011 @ 11:56 am

  21. Mark–

    Florida & Russia. I get those mixed up all the time 🙂

    Just kidding you.

    Re Dalnegorsk–your point re subsidies for maintenance and transportation demonstrates that the city is not self-sustaining and viable. Yes, it may produce something of value, but if its geographic isolation means that it is so costly to produce there, to transport from there, and to support people to live and work there, it’s a losing proposition. That’s true of many of the monogorods: the Soviet Union subsidized them due to its deficient economic logic, or no longer operative strategic reasons. That’s exactly what I mean when I say that perpetuating the subsidies is reinforcing failure.

    I suggest the Hill-Gaddy book. They similarly conclude that the situation offers no pleasant options, and the best alternative is to encourage greater resource mobility, and especially labor mobility in Russia. I’ve read something lately that suggests that Putin is contemplating rules that would have the opposite effect.

    The ProfessorComment by The Professor — January 17, 2011 @ 10:46 pm

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