Can Russia Compete? Enhancing Productivity and Innovation in a Globalizing World Raj M. Desai The Brookings Institution Itzhak Goldberg The World Bank October 15, 2008, The World Bank
Outline Introduction Productivity Innovation Skills Policy Environment Recommendations
Increasing dependence on oil and vulnerability to price changes 40 80 Oil and Gas exports (% total exports) 30 20 10 0 1999 2000 200 1 1998 1997 2007 2006 2005 2004 2003 2002 60 40 20 Oil revenue (% of total revenues) 0 65 60 55 50 45 40 35 30 Brent Oil price US$/ bbl (right scale) 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Economic Diversification Diversification is at the top of the Putin-Medvedev agenda But can it happen via topdown, state-sponsored efforts?
Productivity What do productivity patterns tell us about the sustainability of Russia s economic performance?
Russia s manufacturing productivity lags behind other large economies 1000 900 Productivity (national accounts, left axis) Productivity estimates (surveys, left axis) 10000 Value added (US$) per employee 800 700 600 500 400 300 200 Wages (manufacturing firms, right axis) 1000 100 10 US$ per month (log scale) 100 0 Russia China India Poland Brazil South Africa SpainGermanySouth Korea 1
Real wages increases are outpacing productivity gains 20 18 16 14 12 10 8 6 4 2 0 2001 2002 2003 2004 2005 2006 2007 Labor productivity growth, % Real wage growth, %
Sources of growth Output Growth 50 % K, L Training Innovation Investment Climate Education Labor Legislation Labor Turnover R&D Policy Stability Technology Governance absorption Competition
Innovation Russia s R&D sector is large, but underperforms in publications and patents Russian R&D Institutes commercialize less than in Poland, Croatia, Serbia
Barriers to innovation Benefits from increased globalization have been limited Trade in critical parts and components for electrical machinery remains low FDI inflows in general, and inflows into information, communication and technology sectors (which could speed absorption) are low
Russia s research intensity does not correspond to productivity Manufacturing value-added per worker (thousands US$) 80 70 60 50 40 30 20 10 0 Germany Spain South Korea South Africa Poland Brazil China Russia India 0 1 2 3 4 Reseachers per thousand population
U.S. patents granted, 2005 2007 US Patents Granted (per million population) 4 3 2 1 2005 2006 2007 0 Czech Rep S Africa China Russia Poland Brazil India
Firms that operate in less competitive environments also spend less on R&D and innovate less 80 70 60 Share of firms realizing innovations 50 40 30 20 10 Competitive Pressure 0 High R&D Low R&D No competitive Pressure
Skills Are the skills of Russian workers sufficient for firms to become internationally competitive?
Training is critical for innovation and productivity By international standards Russia s workforce is highly educated But under-funding and deterioration of secondary education, and the absence of effective professional training are potential problems Russian firms that train Are more productive and pay higher wages Invest more in R&D and are more innovative High labor turnover reduces firms investment in training
Labor skills is one of the main obstacles for all firms Taxes Skills Uncertainty Unfair competition Corruption Finance Legal system Licensing Land Safety Infrastructure 50 45 40 35 30 25 20 15 10 5 0 Small Large and Medium Labor regulations Percent of firms reporting obstacle as "most severe"
Russian firms cite a shortage of skilled labor as a primary constraint 50 45 Overstaffed 40 Percent of firms 35 30 25 20 15 10 5 0 Understaffed 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Many firms offer training but few workers are trained Workforce Trained (% of Workers) 80 70 60 50 40 30 20 10 Portugal Spain Malaysia Korea Greece Brazil Chile Serbia Germany Bulgaria Lithuania Russia Ireland China 0 0 20 40 60 80 100 Incidence of Training (% of Firms)
The Business Environment To what extent does the Russian business climate provide opportunities for competitive firms to expand and grow?
Russia has reduced the costs of doing business Start-up costs now lower than in Brazil, China, and India Reforms enacted in 2001-2000 streamlined regulations, reduced administrative barriers for firms, simplified licensing and inspection procedures World Bank-CEFIR monitoring reveals some backsliding
... But firms still bear costs of a poor business climate 25 20 Bribes Infrastructure Problems Security, Protection, Theft Supply Delays Percent of Sales 15 10 5 0 Indonesia Ukraine Russia China South Africa
Costs are not the only problem Policy uncertainty In Russia, the #1 problem (according to firm surveys) According to the World Economic Forum, Russia ranks 75th out of 117 countries in regulatory unpredictability (China ranks 48th, India 50th, and Brazil 65th) Often a result of regulations applied inconsistently or selectively Deters investment Barriers to competition Preferential treatment Informal practices
Does Russia s investment climate hinder innovation? Firms facing weaker competitive pressures do not innovate as much Innovative firms suffer from harsher IC constraints: Are more likely to pay bribes Suffer from more non-payment by customers Pay more in protection payments Monopolistic firms (the least innovative) are relatively sheltered from IC problems
The investment climate is worse for firms that operate in a competitive environment 65 60 55 50 45 40 35 30 Firms facing the least competitive pressure Firms facing the most competitive pressure Governance Administrative Taxation Labor Finance Land Infrastructure Percent of firms that consider each constraint to be major
Recommendations What can be done to improve the global competitiveness of the Russian economy?
Towards a more innovative environment? Current obstacle Firms fall short of their innovative potential Workers lack skills to compete globally Policy environment constrains dynamic firms Way forward Incentives for greater R&D and an improved R&D regime Improved in-house and vocational training Competition in product markets, reduced policy uncertainty, and
Recommendations Facilitate the commercialization of R&D through Matching grants, public-private collaboration But avoid use of tax-based incentives or stateowned venture capital funds Use employer-targeted incentives to invest in in-service training Payroll-levy funds Matching grants
Recommendations (continued) Privatize municipally-held land Improve allocation and protection of intellectual property rights Strengthen consultative processes in designing regulations Updated administrative reform package Limit warrant-less inspections Reduce duplication between governmental bodies in licensing Consider regulatory-review mechanism