Clever Russian Industrialization

Posted: August 11, 2015 in Industrialization, Russia
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Once again coming into fashion are the traditional hysterics and public hand-wringing on the theme that “Russia doesn’t produce anything, but just pumps gas,” with the inevitable addition of the iron forecast that “everything is bad, and will only get worse.” Apparently expecting that industrialization can be carried out in a maximum of 12 or 18 months, some citizens are actively interested by the topic “Where is import substitution?!!” Other citizens are actively dissatisfied with the fact that Russia has not yet learned to produce iPhones, which to many seem to measure technological progress.

First, one needs to look at the recipe for turning into an “international factory” in the concrete example of  China. For this, several components are needed: the cheapest labor possible, a maximum preferential treatment for foreign investors, and total disregard for environmental standards and the safety of labor. As an illustration, we can recall the suicide of Chinese workers at the FOXCONN factory, the very company that produces iPhones:
The photos of rivers and lakes full with chemicals, stories about the “cancer villages”, and the official recognition by China’s leadership that the environment has become an issue of national importance, the curious can easily find yourself can easily be found independently by curious onlookers.
Besides this, China has an enormous advantage: an enormous internal market which can be developed, the expense of which can already be ensured by the returns of industrial development.
When liberals in the like of Gref and Kudrin remorse that in Russia the growth of wages for the last 15 years has greatly outstripped the growth of the productivity of labor, in fact they are saying that what is very bad is that Russia did not follow the Chinese path. Our liberals (and some statists) are pleased to freeze wages at the average level of the year 2000, or at around the level of 80 dollars, so that this, unquestionably would ensure the transformation of Russia into the “assembly plant of Europe.”
Only by this would those who whine on the internet about our lack of industrial growth be happy. Putin understands what the liberals and some statists don’t understand when they regret that “labor costs increased four fold in 15 years.” After the horror of the 90’s and the deficit at the end of the 80’s, an attempt to put the entire country in 10 years on “Chinese rations” would end in demographic catastrophe and, it’s possible, rebellion.
The president has purposefully pursued a policy which for 15 years has enabled Russians to get more and spend more. The president has repeatedly said that we can no longer pay for accomplished successes in economics and geopolitics at the cost of human destinies. As practice shows, only in the case of absolute necessity will be taken which would create discomfort among the population. Unfortunately, few appreciate this.
Roughly speaking, the position of the president has always been that it is impossible to use the population as coal which can be thrown into the furnace of industrial growth. Emphasis was made on the development of areas in which it’s possible to get breakthrough technologies and high profitability. Industry as a whole has grown in the past 15 years:
Furthermore, Russia is now the world leader in the field of armaments, nuclear energy, and space exploration. Winning the bid to construct nuclear power plants in EU countries (Finland, Hungary) has already become a routine for Rosatom, and the leader of NASA recently lamented the fact that “the greatest nation on earth” (of course he means the USA) is compelled to use Russian engines.
The enhanced development of industry, like the enhanced development of agriculture, in the first stage creates serious inconveniences. In the beginning, Russian counterparts for everything, from automobiles to apples, were not as attractive and significantly more expensive because their producers did not subsidize countries with more serious financial opportunities or countries with have an available dollar printer. Recall the protests, meetings, and almost riots which took place during the introduction of protective duties on foreign cars. Who then was interested in the future of the Russian auto industry? To this time, it is still possible to meet citizens who became staunch “white-banner wearers” because “damned Putin” took away their ability to buy used foreign cars for 500 euros.
Now extrapolate this to the whole economy and imagine what it would be like if the same approaches would be applied to all sectors. Now we have considerably more resources, but citizens (in their majority) have adequately perceived that the overlap of imports is not a machination of evil authorities, but a necessary feature of supporting domestic producers, and this dramatically changes the possibilities for import substitution. In the conditions of the activation of geopolitical confrontation, the opportunity has appeared to even break the resistance of some industrialists, literally forcing them to sacrifice short-term economic efficiency in the name of long-term feasibility.
In a recent interview, Minister of Industry Denis Manturov found a poetic description of the situation:
“…those sectors of our economy which consume industrial products have turned towards our industry and have begun to formulate orders. This is an obvious plus. From the point of view of obtaining missing technologies and competition, this is a definite challenge to our engineers and our scientists who will have to cope with this. As a result, in a number of areas we’ll receive samples of products which we never had before in the country, but will now have.”
Judging by the statements of the minister, the process of import substitution in Russia is based on the use of this part of international experience which does not involve the mass creation of work places with a salary the size of three cups of rice a day. Manturov describes a scheme that is widely used in China, Brazil, and India with the addition of strong protectionist features. To some extent even the experience of the pre-war USSR is used. The essence of the scheme is this: the areas where we don’t have the relevant technologies and skills will attract foreign investors. Russian and foreign investors in Russian industry will be guaranteed sales by the bill of the state and orders from the state companies, but in exchange, the investor must ensure the transfer of key technologies and these processes which create the main part of the added value. The Russian auto industry is already going in this way and the results are very good. According to the minister:
“Now, 90% of sales on the domestic market are domestic automobiles produced in Russia. We understood that we are not creating discomfort for anybody and there is no discrimination. If any commercial company wants to buy a certain car which is not produced in Russia, please pay a fee and buy. But a state company or any government agency must rely specifically on those cars which are produced in Russia today.”
Now it’s time to extend the same experience to the rest of industrial spheres. Among the “engines of development” will be traditionally held the defense companies belonging to the state corporation Rostekh for whom the development of civil lines of business remains a priority. Here there is nothing to be ashamed of and no need to have any sort of complex on this occasion. The internet is the brainchild of the US defense industry and there is no reason to believe that the Russian defense industry is incapable of coming up with something equally impressive. It is indicative that even the guru of liberals, the founder of the Higher School of Economics, Yaroslav Kuzminov, admits that the defense industry is vital to our economic growth:
“It is often said, come on let’s halve the weapons program. Now it is already impossible to do this, because the money of an entire generation will be thrown out. It is extremely important not only for our independence, but for the preservation of Russia in the high-tech sector. Now especially these productions form the updated technological potential of our economy. They form a new engineer, a new appliance, and a new skilled worker.”
The depreciation of the ruble, despite it’s total discomfort, works as a productive duty for imports and as a major incentive for Russian exports to compensate for the shallow death of our own market.
Those who panic and freak out will undoubtedly point out that in 2015 industrial production fell. This is true. But from this it is not necessary to make far-reaching conclusion. For example, the industrial output in Germany, seasonally adjusted in June, unexpectedly fell 1.4% compared with May according to the date of the Ministry of Economic and Technology of Germany, but this is no reason to bury German industry. Russian industry requires some time to adapt to new conditions, time is needed for the government program to stimulate industry to work in full force, and time is needed for positive trends to be reflected in statistics. The construction of a new plant or the development of new technology happens slowly than the appearance of food stalls. When we look back five or seven years, we think of current times as difficult ones, but a period of import substitution and the accelerated development of the country’s own industry is needed. We will get everything we need.

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