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Three centuries of Russian development

In 1913, on the eve of World War I, Russia’s national income per capita was about 40% of the levels prevailing in western Europe, according to estimates compiled by the late economic historian Angus Maddison.  Russia had grown rapidly in the century after its defeat of Napoleon, but western Europe had grown even more rapidly.  Per person income in France grew by 1.2% per year throughout the 19th Century; per person income in Russia grew by 0.8% per year.  As a result, a relatively small gap between Russia and western Europe in 1820 had turned into a large gap by 1913.

In the century since 1913, Russia has experienced revolution, collectivization, purges, war, cold war, privatization, and the disintegration of its empire, but its national income per capita is still about 40% of the levels prevailing in western Europe.  Using market exchange rates, western European countries are about three times as rich as Russia, but based on purchasing power parity they are only about twice as rich as Russia.  Exchange rates may fluctuate, but roughly speaking Russia’s position vis-à-vis the west hasn’t changed in a century.

On the one hand, it’s remarkable that Russia hasn’t fallen farther behind.  Despite all the tribulations of the 20th century, Russia kept pace with western European growth rates.  Russians today may fret that their country is somehow backwards or not keeping pace, but the data suggest otherwise.  Incomes in Russia are not as high as in western Europe, but are similar to those in eastern Europe.  On a per capita basis Russia is several times as wealthy as China.  There has been more improvement in Russia over the past century than in any other century in Russian history.  Russians today live fantastically better than did the Russians of 1913.

On the other hand, while Russia may have kept up with western Europe over the past 100 years, it has not caught up.  Peter and Catherine — the “Greats” — may have brought Russia to the brink of modernity, but in the 19th century western Europe opened a huge lead over Russia.  Russia was not stagnant, but it didn’t match the growth rates of western European countries.  In the 20th century Russia did match western European growth rates and stabilized its position vis-à-vis the west, but the 19th century gap remained.  Today’s differences between Russia and the west have their roots not in the privatization era or the communist era, but in the tsarist era.

If Russia fell behind the west in the 19th century and stayed even in the 20th, what of the 21st?  Will Russia finally catch up?  The bankers who labeled Russia one of the “BRICs” — the grouping of Brazil, Russia, India, and China — certainly think so.  And in fact for the 21st century so far Russia’s rate of economic growth has been substantially higher than growth rates in the west.  Russia suffered a severe decline in 2009 but has already made back lost ground.  If current growth rates continue, Russia will easily catch up with western Europe by the end of the century.

This rosy scenario, however, is very unlikely.  It is true that China has sustained very high growth rates for more than three decades, but China in 1979 was an extraordinarily poor country.  It had a lot of catching up to do, and despite 33 years of continuous growth it is still much poorer than Russia.  Similarly, India has been growing consistently since 1990, but today it is even poorer than China.  Very poor countries can grow a long time without ever catch up.

A better BRIC comparison for Russia is Brazil.  Brazil grew very rapidly from the late 1960s through the 1970s.  There was talk of Brazil being the next economic giant, the third superpower, a country that might challenge US control of the Americas.  The Latin American debt crisis put paid to those claims.  Throughout the 1980s and 1990s Brazil’s economy hardly grew at all.  Only in the 2000s did Brazilian growth start up again — and once again people are making extravagant predictions about Brazil’s future.

This kind of boom and bust pattern is typical of middle income countries all over the world.  Their economies grow rapidly for a decade or so, but then short-circuit.  For a while they seem to be rapidly catching up with the west, then for a decade or more they drift with little or no growth at all.  Mexico, South Africa, Indonesia, and even Nigeria have all had their moments of being labeled the Next Big Economy.  All of them grew for a while … then faltered.

In fact, only one large middle-income country has ever grown out of the middle-income ranks to fully catch up with the rich countries of western Europe and North America: Japan.  A few other countries have caught up as well, but they have all been small city-states or oil sheikdoms.  Japan is the only example of a full-sized country with multiple cities, both urban and rural areas, and a diversified industrial base to have developed its entire economy to western standards of productivity.  As such, Japan is the only model we have for the development of a large, diverse country like Russia.

From Russia’s point of view, the example is not promising.  Throughout its period of rapid growth, Japan had high, progressive income tax rates (the top rate was 85%).  It also taxed accumulated wealth and imposed strict capital controls to prevent rich Japanese from moving their money overseas.  The Japanese government used the money collected to invest heavily in its technology, its infrastructure, and most of all, its people.  It also directed Japanese banks and rich individuals to invest inside the country.

Russia could theoretically do the same, but it is not clear that Russian elites (as a class) have an incentive to do so.  If the Russian government wants to foster long-term economic growth, it should focus on reducing income inequality and redirecting income to socially productive purposes.  Oligarchs should be taxed and the proceeds used to build internal human and physical infrastructure.  While some economists might argue that taxes harm growth, only the most ideologically-blinded fundamentalist would argue that the maintenance of extravagant luxury lifestyles among the elite is a socially productive use of Russian national income.

The problem for Russia is that while fiscal redirection in favor of domestic investment may benefit the vast majority of Russians, it would not benefit the small number of Russians who control the country’s political system.  This problem is not manufactured within the country itself but is instead imported from the structure of the larger world-economy of which the country is a part.  If Russia were the whole world, there would be nowhere for Russian capital to flee.  But so long as Russian capital can flee to London, New York, and Geneva, it will.

The 21st century for Russia is thus likely to be much like the 19th and the 20th.  Russia will grow, but it will not grow fast enough.  It is unlikely to catch up with the west so long as the Russian government maintains a flat 13% income tax and permits large-scale capital flight.  Russia is too big a country to be floated on oil and natural gas like some Middle Eastern emirate.  It needs intensive internal development of the kind that only progressive taxes and good government can provide.  Without these, it will always remain on the outside of the developed world, jealously looking in.

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Sydney-based globalization expert Salvatore Babones is available to speak on the Chinese economy (demographics, growth, technology), the Belt & Road Initiative, global trade networks, and Australia-China relations. Contact: s@salvatorebabones.com