COMMENT: How Russia could be more productive

By bne IntelliNews October 1, 2009

Vitaly Klintsov, Irene Shvakman, and Yermolai Solzhenitsyn of McKinsey Global Institute -

The way out of the economic slowdown in Russia is a more effective use of the country's resources, not just more resources.

Russia's economy, like the world economy as a whole, fell off a cliff during the first half of 2009, with GDP down roughly 10%. It's a movie the country has seen before: GDP fell more than 40% following the Soviet Union's collapse in 1991, and in 1998 Russia defaulted on its debt, the ruble plummeted, and economy-wide capacity utilization fell below 50%.

Last time around, Russia experienced a dramatic economic turnaround: GDP grew at an average annual rate of 7% between 1998 and 2007, vaulting the country to 53rd (from 72nd) in the world rankings of wealth. Wages increased strongly as well, with disposable income rising 26% a year in nominal terms.

Pulling off a similar rebound will be more challenging now. Even before the global downturn, capacity utilization was approaching 80%, and the days of relatively easy expansion through better use of the existing capital stock were drawing to a close. 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 labour force could shrink by as many as 10m people by 2020. The financial crisis has made raising capital for investments more difficult and has battered commodity prices-including those of oil, metal ores, and coal. Commodities collectively represented around 20% of Russia's GDP in recent years. Now Russia must grow by making better use of labour and capital resources-in short, higher productivity.

Productive uses

The McKinsey Global Institute (MGI) has twice studied Russian labour productivity: first in 1999 and now in 2009. During the intervening years, economy-wide labour productivity increased to 31% of US levels, from 22%.

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.

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