The World Bank forecasts Russia’s growth for 2018–2020 will remain modest at 1.5–1.8% (Figure 7), rates below the EMDE average (4.6%), but exceeding the AE average (1.7%) in 2020. The key factors governing the World Bank’s projection are a dyspeptic global environment, a declining labour force and slowing total factor productivity growth (TFP).
The declining trend in TFP is a global phenomenon. Weaker productivity growth has been attributed to slower investment growth, partly because of deleveraging pressures and other crisis legacies, combined with an ageing population and maturing global value chains. In Russia, TFP growth slowed as productivity gains of first-generation reforms wore off. The changing composition of investment from machinery to construction could also have contributed to the lower TFP growth. Globally, investment growth halved between 2010 and 2016, with the weakness shifting from advanced economies to EMDEs over this period. In Russia, although investment growth slowed from an average growth of 10.4% during the previous decade to 2.8% in 2010–2017, the investment as a share of GDP increased (Figure 8). This helped to accelerate capital growth over the period 2010–2017.
Figure 7:The growth forecast for Russia suggests benign growth (real GDP growth, %).
Source: Rosstat, World Bank.
Figure 8:Russia’s investment-to-GDP ratio stopped increasing; capital-to-GDP ratio remains low. (a) Gross fixed capital formation as a percent of GDP for Russia. Capital as a percent of GDP for Russia. (b) Lower line indicates GDP weighted average of 32 advanced economies.
Source: Haver Analytics, Penn World Table, World Bank.
Russian demographic trends are worse than those found in many EMDEs (but not China) as the country’s low total fertility rate in the early 1990s accelerated population ageing. Russia’s total fertility rate remained low until the mid-2000s. The decline in the total fertility rate began to take a toll on the working-age population after 15 years, with potential labour force growth peaking in 2007 at 0.7% before declining to −0.7% in 2017. This suggests to the World Bank that short of unexpected surges in productivity growth, the outlook for Russian GDP growth is mediocre.
Misleading Benchmark
The World Bank’s modest short- and near-term expectations for the Russian economy reflect its outlook for a maturing global economy (perhaps even a climacteric) (Kindleberger, 1974). Its optimistic long-term attitude is a corollary of its faith in globalisation. The World Bank and International Monetary Fund consider most economies “normal” in a comprehensive development scheme that moves backward nations in stages from autarkic illiberal regimes to high-performing liberal members of the global community (Shleifer and Treisman, 2005; Rosefielde, 2005a). Each nation’s position in the global development hierarchy and a handful of technical factors including foreign direct investment, technology transfer, state macroeconomic management skills, education and integration into competitive global trade and financial networks determine economic performance everywhere. Moreover, the World Bank believes that political and social progress go hand-in-hand with economic globalisation. It expects Russia to eventually discard its Muscovite characteristics, democratise, liberalise, transition and integrate into a Western-led transnational global order with progressive values.
The World Bank knows that Russia has distinctive Muscovite characteristics, but as it perceives things, this does not change the fundamentals. The immutable laws of globalisation it insists must inevitably govern Russia’s economic, political and social performance. The attitude has some empirical validity. GDP growth does decelerate as emerging nations move up the development ladder. The transfer of macroeconomic management skills does allow less developed nations to cope better with involuntary underemployment, inflation, budgetary deficits, poverty, insurance transfers, education and social safety nets.
However, this is not the whole story. Modernisation does not settle the equally important issues of hegemony, hard power, market power, political power, corruption, inequality, economic justice, social justice, civil rights, environmental purity, other intangibles and well-being. Faster growth, full employment and modest inflation achieved within Russia’s imperfectly competitive market system with Muscovite characteristics will bolster the Kremlin’s economic power, but this is unlikely to prevent Moscow from continuing to undervalue consumer utility, abuse large segments of society and structurally militarise and browbeat its neighbours.
Tea Leaves and Productivity
The World Bank’s approach to economic crystal ball gazing is congruent with Western tradition, especially the important role assigned to globalisation and TFP. The approach is sensible, but too often misses critical turning points (Rosefielde, 2005b, 2017). The Soviet economy grew rapidly under Stalin’s autarky during the polarised Cold War era of 1955–1968. TFP calculations suggested smooth sailing ahead, encouraging some observers to conclude that planned economy and communism would triumph, but then the USSR fell prey to “growth retardation” driven by a declining marginal capital productivity. The CIA warned about the danger of Soviet secular stagnation (zero growth) in the 1980s; however, it did not take its own warnings seriously in part because Gorbachev pressed market reforms after 1986 and promoted economic integration with the West (globalization). The CIA was shocked when the wheels came off the cart in 1989.
Later, after Boris Yeltsin privatised business property on a freehold basis, encouraged free enterprise and opened Russia’s economy, the catastrophic result took the World Bank entirely by surprise. It expected Russia to recover “up the J-curve” rapidly (Brada and King, 1993), but this never happened. Then, 7 years later when Russia’s economy finally began recovering, the World Bank predicted rosier and rosier futures with Russian GDP advancing at 8% per annum until reality hit. GDP fell 8% in 2008 and never rebounded to the fast growth track.
Obviously, neither globalisation nor TFP have proven to be trustworthy indicators of Soviet and Russian economic prospects. This has multiple explanations beyond exogenous economic and political shocks. Statistical fraud and military concealment stand at the top of the list. The Soviets indulged in a practice called “spurious innovation” where they treated established goods as new ones, raised prices and mischaracterised the price increase as value-added instead of inflation. Inflation increased, but it was disguised as real GDP and hence the term “hidden inflation”.
Much of the per capita income growth claimed by the Soviets was fake (Rosefielde, 2007). The opposite was true for defence. The Soviets and now the Russians understate military activities, especially weapons procurement in their GDP statistics. The World Bank ignores the issue and the impact of military activities on TFP and macroeconomic stability across arms procurement cycles. Russia’s double-digit arms build-up 2010–2015 is invisible in the World Bank’s assessment of Russian economic performance and prospects for harmonious globalisation. Caveat emptor.
Merit
The World Bank’s data, methods and assessments do not provide inclusive pictures of Russian economic merit (Rosefielde and