Russia economy: a very short introduction - Book review (EH net)

 Published by EH.Net (November 2020)

Richard Connolly, The Russian Economy: A Very Short Introduction. Oxford: Oxford University Press, 2020. xv + 151 pp. $12 (paperback), ISBN: 978-0-198-84890-5.

Reviewed for EH.Net by Ilya Voskoboynikov, Department of Economics, HSE University.

The Russian economy is, modifying Winston Churchill (1939), “a riddle wrapped in a mystery inside an enigma”; Russian economic performance is volatile. In the last three decades its institutional environment changed from a command to a market economy. Its industrial structure shifted from overinvestment in manufacturing and agriculture in the late 1980s to market services and mining (Voskoboynikov 2020). Trade conditions seem to be unpredictable. This is a sensitive issue for the economy, which depends on oil and gas exports. How can one understand the Russian development pattern over its centuries-old history and, possibly, outline Russia’s prospects for the future?

Perhaps there is a key. Richard Connolly dubs that key the “Russian system of political economy” — the System. For centuries, Russia could be characterized by (1) the weakness of its legal system, (2) the underdevelopment of modern economic activities, (3) technological underdevelopment and (4) lower living standards in comparison with major developed economies. The System explains why these features have proven to be so persistent.

Connolly departs from the system of political economy of Robert Gilpin, who highlights three main respects of any economy: the primary purpose of economic activity, the role of the state in the economy and the structure of private business. Historically, in Russia, this purpose was the subordination of economic activity to national security, both external and internal. This has predetermined the primary role of the state in the economy, reallocating resources to national security. Consequently, the position of private business is relatively weak and is characterized by weak property rights. To be successful, it is much more important to connect with state officials and block competition, rather than to produce competitive products.

The System explains the persistence of features (1)–(4). The central state delegated to the so-called state agents — pomeshchiki (landowners), governors or individual communist party bureaucrats — power to extract and reallocate resources and match target objectives at the cost of other activities. The central state granting agents autonomy and overlooking some abuses of power fueled the weakness of the legal system and of property rights. The threat of expropriations reduced the incentives of local private businesses to invest in new production, qualified workers, new technology and innovation. As a consequence, modern economic activities remained underinvested and technology underdeveloped. All these factors impacted productivity growth negatively and led to the deterioration of living standards.

The chapters of the book demonstrate effectively how this framework was formed and how it has worked throughout Russian history. Chapter 1 covers the four centuries from the formation of the Tsardom of Russia (later the Russian Empire) in sixteenth century to the October Revolution in 1917. This period demonstrates that the subordination of economic activities to national security originated from threats from several strong powers in the West and nomadic raiders in South and East. Russia was not alone in dealing with such external pressures, but with no natural geographically defined borders, such as mountains, coastlines, border lakes or rivers, the challenge for Russia was much stronger than for other Eurasian empires. Chapter 2 shows that the Soviet system of political economy, which formed by the mid-1930s and remained unchanged until the end of 1980s, turned out to be the extreme version of the traditional Russian System. Chapters 3, 4, and 5 discuss the formation of the modern system of political economy, which passed through the stages of market stabilization, liberalization and privatization in 1990s; the recovery of the role of the state in 2000s, accompanied by soaring growth rates; and the economic stagnation of 2010s.

The book is worth reading for economic historians. It provides a very simple and consistent conceptual framework, which helps to deal with the wealth of facts and data on the last five centuries of Russian economic history. This framework also demonstrates the difference between modern Russia and its predecessors – the Soviet Union and, to a lesser extent, the Russian Empire. Although national security remains one of the priorities for modern Russia, general social and macroeconomic stability are also the priorities (pp. 78, 85-89). The level of inflation is now at the historically lowest level since 1990. The budget deficit and unemployment are more than reasonable (pp. 83, 87).

The real challenges for Russia are demography, energy dependence and, probably the biggest, the weak legal system. The origins of this weakness are of specific interest and are of my main concern about the book. Connolly states (pp. 6-9) that the use of agents helps the central government to extract revenue, control vast territories and the population, and mobilize resources in times of the crisis with few formal controls. Most of the time the agents ruled their areas as their own domain and sometimes ignored the law. The central government needed the agents and controlled them weakly. As a result, national laws and informal local rules co-existed and collided, weakening the legal system and fueling the conflict between the central government and its agents for centuries.

A related issue is the lack of clarity on the ambiguous concept of the state in the book – specifically, a lack of clarity about the role of the state or its agents in proizvol (the arbitrary treatment) of serfs by their landlords or of a collective farmer by the local Communist Party authority. The same conflict appears in relations among the Soviet government, the ministries and managers of state enterprises (Gregory and Harrison 2005) and in the illusion of State Planning Committee control (p. 14). In all these cases, the state is both strong and weak. It is strong, because the landlord in eighteenth century and the local Communist Party authority in the Soviet era had power within their responsibilities or communities. It is weak, because the central government usually lacked the capacity to keep such agents under control and overlooked the abuse of law by its agents.

The central government made multiple attempts to enforce law and bind its agents. Kormlenie (feeding — the practice in pre-modern Russia of maintaining local officials at the expense of those they governed) was cancelled in sixteenth century. These attempts can also be seen in the constraints of serfdom up to the Emancipation Manifesto (1861) of Aleksandr II, which abolished serfdom. Unfortunately, the abolition of serfdom and its consequences are not discussed in the book, except the short paragraph of consequences of reforms after the Crimean War (p. 11). Scholars link Russian economic growth in the second half of nineteenth and early twentieth centuries to these reforms, including the abolition of serfdom and the subsequent progressive judicial reform. This was an important step forward, which improved the legal system and had a strong impact on economic performance (see, e.g., Markevich and Zhuravskaya (2018)). That is also an important lesson for Russia today.

Another concern is the issue of human capital, closely connected with the middle class and prospective future growth and development. Connolly notices that the Russian population now is highly educated by global standards (p. 114). I would add that the advances of education at all levels and healthcare system are achievements of the Soviet period (see, e.g., Nove 1992, pp. 359–62). This legacy of the Soviet Union makes the position of modern Russia in the global economy different from the Russian empire. In the early twentieth century, the illiteracy rate in Russia was 60% (1913) versus 11% (1900) in the US (Gregory and Stuart 2001, tab. 2.5).

These aspects, however, do not diminish the merits of the book, which helps us reflect on the centuries of Russian economic history and outline its future. Demography, energy dependence and the weak legal system (chapter 7) are particular challenges. The latter was explicitly exposed by the case of Russian oligarch Mikhail Khodorkovsky (pp. 44-45, 60-61) with the questionable legacy of privatization of oil company Yukos in the early 1990s, his payments to deputies in Russia’s parliament to support legislation of his business interests in the early 2000s and the transfer of the main oil-producing arm within Yukos to the state-owned company Rosneft. However, the Russian economy now is in a better position in comparison with 1917 or 1991. In spite of the importance of security issues and the high military expenditure, nobody seriously considers the big push approach or mass property confiscations and deportations, similar to the industrialization or collectivization of late 1920s–early 1930s. The primary purpose of the state is not only security. The role of the state is high, probably excessive, but not as high as three decades ago, and the chances of returning to a Soviet-like planned economy are negligible. In contrast with the period of the empire, the level of education in Russia now is much higher. In contrast with the Soviet period, the middle class, formed in 1990s, is also remarkable. Success will come when not only the government, but also Russian citizens, start considering improvements to the legal system as the top priority. The new book of Richard Connolly is very supportive of this idea.

References:

Churchill, Winston. 1939.  \”The Russian Enigma.\” London: BBC. The Churchill Society. http://churchill-society-london.org.uk/RusnEnig.html.

Gregory, Paul, and Mark Harrison. 2005. “Allocation under Dictatorship: Research in Stalin’s Archives.” Journal of Economic Literature 43 (3): 721–61.

Gregory, Paul, and Robert Stuart. 2001. Russian and Soviet Economic Performance and Structure. 7th ed. Boston, MA: Addison-Wesley.

Markevich, Andrei, and Ekaterina Zhuravskaya. 2018. “Economic Effects of the Abolition of Serfdom: Evidence from the Russian Empire.” American Economic Review 108 (4–5): 1074–1117.

Nove, Alec. 1992. An Economic History of the USSR. 1917-1991. 3d ed. Penguin Books.

Voskoboynikov, Ilya B. 2020. “Economic Growth and Sectoral Developments, 1990-2008.” In The Economic History of Central, East and South-East Europe: 1800 to the Present, edited by Matthias Morys, 520. Routledge (forthcoming).

 

Ilya Voskoboynikov is a Leading Research Fellow and an Assistant Professor at National Research University Higher School of Economics in Moscow. He is currently focuses on consequences of a command economy period for development and long run growth.

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