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. Last Updated: 07/27/2016

The Productivity Trap

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Russian experts and policymakers have increasingly raised the question of productivity, stressing that the country's lag behind leading global economies has become an acute nationwide challenge. On May 15, President Dmitry Medvedev addressed the issue at a meeting on modernization and technological development and emphasized that "we must not forget one simple, unfortunate fact: Labor productivity in this country is currently equivalent to only one quarter of the labor productivity in the United States."

According to the World Bank, every employed Russian contributes only $16,100 to the country's gross domestic product, compared with $38,100 in South Africa, $48,600 in Greece, $59,400 in France and $74,600 in the United States.

But these numbers alone do not reflect the true scope of the problem. Russia's low productivity is exacerbated by the fact that the country is dominated by natural resource extracting with relatively little industrial development in the real sector. Although the overall productivity in Thailand ($12,500 of GDP for an employed person), Brazil ($16,700) or Malaysia ($22,900) do not differ from Russia's in a dramatic way, in these countries' high-tech industrial exports account for 16.2 percent, 22.4 percent and 36.7 percent of all exports, while in Russia they constitute a meager 2 percent. Thus, Russia suffers not only from a low level of productivity but also from a counterproductive economic structure, slow technological progress and outdated labor relations.

The country's economy in recent years shows two distinct features. First, an unprecedented economic boom from 2001 to 2008 failed to produce significant additional employment. For example, in the mid-1990s there were 66.3 million people employed. In April, the number stood at 67.5 million, indicating an increa-se of only 2 percent. The United States in the same time period increased from 123 million employed to 144 million, or by more than 17 percent.

Second, real wages increased 12.2 percent a year in Russia during these seven years, while the expansion of the country's GDP was roughly 6 percent. In the United States, the labor costs in manufacturing between 2001 and 2008 declined by more than 25 percent in U.S. dollars when compared with 14 major countries from the Organization for Economic Cooperation and Development. This underscores how much Russia lags behind developed nations in terms of productivity.

Can the situation be improved in the near future? Productivity is bound to be low for several reasons. First, an improvement will depend on the overall level of economic development in the country. But in Russia, where the prices for domestically produced goods and services are from two to three times cheaper than in Western Europe or in the United States (absent a few exceptions such as real estate and construction), the absolute amount of value added is limited -- and so is productivity.

The second reason why the future looks bleak for improving the country's productivity has to do with the woefully low output per worker. Automobile manufacturing is the most glaring example. In 2007 at AvtoVAZ, 106,000 full-time production workers manufactured only 734,000 downscale vehicles. BMW, employing 107,000 workers at its German plants, produced 1.54 million upscale vehicles. The main reason for this large discrepancy is Russia's outdated technical basis and the unwillingness of companies to adjust their labor force to the requirements of the market. Another factor was the huge inflow of low-skilled workers from former Soviet republics, which also decelerated technical change.

A third factor is the excessively high number of people employed in security services. About 4 million people are employed in the military and law enforcement agencies, while an additional 700,000 people work for private security companies and in corporate security services. This is terribly inefficient, particularly if you look at Western countries where so much of security services has been automated.

Leading companies facing a falling demand on their products should optimize their workforce and cut the dead weight even if that means laying off as much 30 percent of their personnel. This is a good time to implement this restructuring since expanding production during the crisis is not an option. The main obstacle, however, is the country's increasing unemployment, which has become a volatile political issue. The government has urged entrepreneurs not to be too harsh in terms of layoffs. AvtoVAZ, for example, has followed the Kremlin's cue by cutting workers' shifts to one day per week instead of laying them off.

In the end, modernizing the country will truly be a formidable task, and this will remain the case as long as the Kremlin is obsessed with protecting and strengthening state-controlled "strategic industries." This is a productivity dead end, and it leads me to believe that 2009 productivity levels decline even further.

Vladislav Inozemtsev is the director of the Research Center for Postindustrial Society and the publisher and editor-in-chief of Svobodnaya Mysl magazine.