How competitive is Russian economy?
How
competitive is Russian economy?
Introduction
Russian economy has been studied by numerous
international organizations, academics, and other analysts. And consequently
there are strongly divergent views about the state of Russian competitiveness.
Strong economic growth, fiscal surpluses, and reforms in some areas of the
business environment are compared with huge continuing challenges in doing
business in Russia as well as rising government intervention in the market,
especially in energy. This mixed evidence has been interpreted very
differently. Within Russia (including many foreign companies operating in the
country), there is optimism about the progress of the nation’s economy. Outside
of Russia, there is deep scepticism about whether the current economic success
of Russia extends beyond high oil prices, and whether the increasing
concentration of economic (and political) power in the central government has
changed the course of Russia’s reforms for the worse. There is some truth in
each of these perspectives, but a deeper analysis is needed to truly understand
where Russia stands and to guide future policy.
In this coursework it will be proved that modern
Russia has no inherent reason for not entering a period of high and sustained
growth and that it can join the ranks of the most competitive economies in the
world in the near future.
The coursework is organized in three sections.
First, the assessment of Russia’s current competitiveness is presented,
highlighting the roles of the country’s legacy, its broad economic context,
microeconomic conditions, and current market structure. Second, the evaluation
of Russia’s economic performance on micro level is introduced with description
of current market structure's effect on business environment. This part also
introduces overall performance assessment. Third, the competitiveness of
Russian economy on the global arena is presented and broadly evaluated.
1. Theoretical background to the market structure and
competition
1.1 Concept of competitiveness and competition
endowment
russian economy
Competitiveness can be
defined at the firm level, the industry level, and the national level. At the
firm level, competitiveness is the ability to provide products and services
more effectively and efficiently than relevant competitors. This includes sustained
success in international markets without protection or subsidies.the industry
level, competitiveness is the ability of the nation’s firms to achieve
sustained success versus foreign competitors, without protection or
subsidies.the national level, competitiveness means the citizens’ ability to
achieve a high, and constantly rising, standard of living. In most countries,
the standard of living is determined by productivity, which deploys national
resources and the output of the economy per unit of labour and/or capital
employed.
Competition in economics is the rivalry
between two or more businesses to gain as much of the total market sales or
customer acceptance as possible. It helps to maintain reasonable prices,
provides consumers with new and improved products, forces businesses to operate
efficiently and results in a wide selection of products from which to choose.was described
by Adam Smith in The Wealth of Nations (1776) and later economists as
allocating productive resources to their most highly-valued uses and
encouraging efficiency. Smith and other classical economists before Cournot
were referring to price and non-price rivalry among producers to sell their
goods on best terms by bidding of buyers, not necessarily to a large number of
sellers nor to a market in final equilibrium.microeconomic theory distinguished
between perfect competition and imperfect competition, concluding that no
system of resource allocation is more Pareto efficient than perfect
competition. Competition, according to the theory, causes commercial firms to
develop new products, services and technologies, which would give consumers
greater selection and better products. The greater selection typically causes
lower prices for the products, compared to what the price would be if there was
no competition (monopoly) or little competition (oligopoly).
1.2 Models of Competition
classify markets according to conditions that
prevail in them. They determine market structure, or the nature and degree of
competition among firms operating in the same market. Economists have names for
these different market structures. They are Pure Competition, Monopolistic
Competition, Monopoly and Oligopoly.
Pure Competition
Pure competition is a
market scenario that includes a large number of autonomous and knowledgeable
buyers and sellers of an identical product. Yet none of which are capable of
influencing the price. There are five major conditions, which characterize
purely competitive markets.
1. There are a
large number of buyers and sellers. No single buyer or seller is large enough
or powerful enough to affect the price of the product.
2. Buyers and
sellers deal with identical products. Therefore buyers do not prefer one
seller's merchandise over another's because there is no brand names, and no need
to advertise.
. Each buyer and
seller acts autonomously, there must be no collusion. If such a situation
occurs, sellers would compete against one another for the consumer's dollar.
Buyers also compete against each other and against the seller to obtain the
best price.
. The buyers and
sellers are knowledgeable about the items for sale. Because all products are
exactly the same, customers would have little reason to remain loyal to one
seller.
. The buyers and
sellers are free to get into, conduct, and get out of business; thus making it
difficult for a single producer to keep the market just to itself.
Monopolistic Competition
Since we live in a
society where the five elements of pure competition are not available to us,
then we are clearly operating in a state other than pure competition. Instead
we operate under a different model of competition known as monopolistic
competition. Any time the elements of pure competition are not met the existing
model is monopolistic competition.fundamental difference between a pure
competitor and a monopolistic competitor is that the latter refrains from
selling identical products. By employing product differentiation, the
monopolistic competitor is trying to establish a comparison between its product
and another competitor’s product.
Oligopoly - a few large
sellers dominate and have the ability to affect prices in the industry. Because
of the fact that in an oligopoly there are very few firms, whenever one firm
does something, the others follow suit. Since all the firms have considerable
power and influence, firms tend to act together. There are times when the
interdependent behaviour of the firms results in a formal agreement to set
prices; this is termed «collusion». Price-fixing, a type of collusion, is the
action taken by an oligopoly to charge the same or similar prices for a
product. The firms must also agree to divide the market so that each is
guaranteed to sell a certain amount. Yet collusion is against the law because
it restrains trade. Price wars are also common in oligopolies. When one firm
lowers prices, it leads to a series of price cuts by all producers that may
lead to unusually low prices in the industry. Raising prices is also risky
unless the firm knows that rivals will follow suit. Otherwise, the higher priced
firm will lose out on sales. An example might be Coca Cola and Pepsi which
dominate the soft drink market.
Pure Monopoly exists when a
specific person or enterprise is the only supplier of a particular commodity.
Thus, the main characteristics of monopoly include profit maximizing
orientation; a monopolistic enterprise decides the price of the good or product
to be sold; there are tough barriers to entry - other sellers are unable to
enter the market of the monopoly. As in a monopoly there is one seller of the
good which produces all the output, the whole market is being served by a
single company, and for practical purposes, the company is the same as the
industry. A monopolist can change the price and quality of the product. He
sells more quantities charging fewer prices for the product in a very elastic
market and sells less quantities charging high price in a less elastic market.
1.3 Russia’s endowment
faces complex endowments that create unusual
challenges for competitiveness. These challenges-some of them unique to Russia
given its recent history while others which are typical for many countries at
this stage of development-must be confronted head on in economic
strategy. Otherwise the performance of the country will remain below its
potential and the political sustainability of economic reforms will suffer.
Russia’s history as a planned economy left the
country with an economic legacy that still reflects political
decisions instead of economic efficiency1.
Companies grew up at locations that were
determined according to political and security considerations - not by the
concept of the efficient economic geography. Company units were often too
large in terms of productive capacities at a given stage of the value chain,
but too small in terms of presence and capability across the value chain.and with
it demand patterns also reflected political decisions, not individual choices. With
citizens strongly influenced to live in the far north and east as well as in rural regions
and smaller cities, a substantial population reallocation was inevitable2. Greater
urbanization has important potential economic and social benefits for Russia,
but
the
transition will be painful.’s Soviet past, however, left the country with
important assets that it can build upon. The general skill level of the
population is high, and education is held in high respect. The science
system consists of a large number of research institutions employing a significant
number of highly educated scientists and engineers, especially in natural sciences and
technologies related to military uses. The basic physical infrastructure of the country also
provided a good base to build upon, though it is now increasing inadequate.,
Russia’s early steps towards economic reforms, especially the privatizations
of the mid-1990s, has left the population with a deeply cynical and biased view of the
market economy. In Russia, the market economy has become associated with private
monopoly, not competition.ownership and wealth are seen as the result of political
connections and criminal behaviour, not entrepreneurship and value creation.
This is one of the reasons why the population is strongly in favour of
government actions that intervene and reign into the power of business.
Unfortunately, there is little public support or pressure for the government to
create more room for private entrepreneurship or ensure equal treatment
of all companies.
Geography
Russia’s huge geographic area creates the need
for effective regional governance structures to improve the business environment at
lower levels of geography.’s location between Europe and Asia puts it in a
potentially beneficial position alongside major trade routes. However, the
inaccessibility of Russia as a transit country in the past and the
weaknesses in its current business environment has left this opportunity
untouched. Most global trade flows are far away from Russia. Russia is also a country with
only a limited share of its population in coastal regions that could easily connect to the
global economy.’s neighbours are largely former Communist countries that share
many of the same challenges that Russia is facing now. But Russia also borders
to the European Union (through borders with Finland, the Batiks, and - through
Kaliningrad - Poland) and China; countries offering interesting economic
opportunities if Russia can take advantage of them. So far,
relationships with neighbours have been mostly negative instead of seeking opportunities
for win-win economic collaboration.
Natural Resources
Russia’s significant natural resource wealth has
facilitated rapid wealth extraction but created political and
economic challenges. Russia’s oil exports per capita were at $935 in 2005, and oil
production per capita at about $12903.has proven reserves of about 74m barrels
oil (6.5% of total global reserves) and 48trill m2 natural gas (equivalent to 300m barrels
oil; 26.7% of total global reserves),4 and these reserves
represent an annual value of $3,900 per capita for the next 50 years assuming an
average oil price of $75 and a stable population.level of resource wealth is
substantial, and has fuelled a boom since 2000. However, even this
level of resources will not itself make Russia a wealthy country.the same time, economic
volatility, due to unpredictable changes in world commodity prices and upward
pressure on the real exchange rate, can easily undermine business investment
and
the
emergence of a vibrant private sector outside of natural resources., natural resource
wealth of this size creates huge incentives to capture and utilize the power
and
wealth
that resource abundance provides, putting pressure on Russia’s fragile
political structures and government institutions.
2. Russia’s microeconomic environment
2.1 Engendered structural dominance
the national level, the
degree of concentration of industrial output in Russia does not indicate that
the lack of competition is a structural problem. The four-firm concentration
ratio5 many industries averages about 60 percent, which is similar
to that in the United States, and the largest Russian manufacturing enterprises
(measured by number of employees) are not unusually large, compared with U.S.
firms. However, this analysis of structural dominance masks three underlying
attributes of Russia's industrial landscape., large Russian enterprises tend to
be organized as single, integrated, multiplant establishments often located in
or near the same city, whereas enterprises in industrial countries usually have
multiple establishments at several different locations domestically and, often,
abroad as well. Thus, the establishments of the largest Russian enterprises
are, on average, significantly larger (in terms of number of employees) than
their counterparts in other countries, including the United States. Although the
existing level of horizontal integration in Russian manufacturing is largely a
legacy of Soviet central planning, such integration appears to be increasing.
The increase is due not to new corporate expansion, however, but to mergers and
acquisitions., many of the dominant enterprises in Russia are also highly
vertically integrated (or have exclusive buyer-seller relationships). To be
sure, putting successive stages of production under one corporate roof can
result in economies of scale and reduce transaction costs. But in most
industries, such vertical efficiencies exist only up to a certain point.
Indeed, in many product markets throughout the world, it is increasingly
cheaper for a firm to buy inputs (or sell outputs) on the open market than to
produce them internally.Russia, because the enforceability of contracts still
cannot be taken for granted, there are strong incentives for vertical
integration. The uncertainties and chronic shortages of the old Soviet supply
system encouraged a high degree of vertical integration, which has persisted,
in part, because of inertia. Moreover, vertical integration, like horizontal
dominance, is increasing-again, usually through mergers and acquisitions rather
than expansion. Importantly, excessive vertical integration superimposed on
horizontally concentrated product markets can hinder the entry of rival firms.,
significant political and economic power is wielded by regional authorities in
Russia, a feature of other large transition economies, such as China. This is evident
in the tight control of important economic activities within a region. Such
control, in combination with vertical integration, helps freeze the high degree
of structural autarky that appeared under the Soviet system, when producing
consumer goods was a local responsibility and enterprises served only local
markets. Worse, it strengthens administrative-as opposed to economic-geographic
market boundaries and fosters the regional segmentation of the Russian economy,
hampering the establishment of a unified economic space, strong interregional
competition, and natural economies of scale.
Local authorities engage in a variety of
practices to limit the interregional movement of goods and services, including
charging duties on the «import» or «export» of certain alcoholic beverages;
maintaining regional price controls on some agricultural products; imposing
registration fees on workers from other regions; granting tax or credit
preferences to support the building of local «business champions»; and
supporting arbitrarily exclusive licensing. In this regard, it is telling that
in recent years some of the most frequent violations dealt with by the Ministry
of Antimonopoly Policy and Support for Entrepreneurship have been
anticompetitive actions by local governments.
.2 Russian economic performance
most important single element explaining a
country’s medium-term growth performance is productivity. While economic growth
can be based on many sources, for example capital accumulation or population
growth, it is sustainable only if complemented by an increase in productivity.
With a GDP per capita of US$10,521 in 2010 (international $15,806 in purchasing
parity terms), over the 2000-09 period Russia achieved a relatively high GDP
growth rate of 5.5 percent, which put the country on the path toward
convergence with Organisation for Economic Co-operation and Development (OECD)
levels (see Figure 1).
Figure 1: Russia GDP Growth Rate
, despite this positive development over the past
decade, the gap between Russia and OECD economies in terms of GDP per capita
remains sizeable, amounting to about 47 percent.some structural factors-such as
demography, the employment structure, and above all the number of hours worked
per person-contribute to closing the gap, the large difference in prosperity
can be clearly attributed to differences in labour productivity (see Figure 2).
Figure 2:Disaggregation of difference in
GDP per capita in the Russian Federation and the OECD, 2010
Indeed, Russia’s solid GDP growth over the past
decades has been accompanied by growing productivity. In transition economies,
productivity growth is often a reflection of increasing capacity utilization;
this is also the case in Russia., after correcting for capacity utilization,
out of the 6.5 percent growth achieved on average during 1999-2005, about 4.15
percent was attributable to gains from resources that were used6.of
this growth in productivity has been the result of efficiency gains within
sectors rather than reallocation among sectors. Overall, productivity growth
that took place within the firms-that is, growth that occurred through greater
efficiency in production processes, the shedding of surplus labour in the
course of the privatization process, and better organization of administrative
functions-explains the largest share of efficiency gains, accounting for about
30 percent of total manufacturing productivity growth from 2001 to 2004.2 Much
of this was a result of labour shedding in the initial transition period.the
shrinking of the manufacturing sectors is a process that most transition
economies have undergone, the decline of Russian manufacturing beyond the
initial transition period remains a worrying trend for a number of reasons.most
important is that, while the number of jobs in manufacturing is declining,
employment in the government sector is growing, pointing to a move toward a
growing role of the state that is built on the redistribution of resources
rather than creation of value. Furthermore, the Russian Federation is well
positioned to be competitive in high-end manufacturing sectors. It could aim at
improving the business environment and creating favourable conditions for the
development of these industries.number of studies show that the decline in
manufacturing competitiveness in Russia is due to the combination of an
increase in real wages and shortcomings of the business climate7, which puts
Russia at a disadvantage in international comparison.productivity in the
country is higher than in India and China, high Russian salaries mean that for
each dollar of wage, a Russian worker produces half the output of his or her
Chinese or Indian peers. Competitiveness enhancing reforms will improve the
business environment, strengthen efficiency, and align manufacturing
productivity better with international wage-productivity ratios. This will make
Russia more attractive as an exporter of goods and tradable services as well as
a destination for foreign direct investment (FDI).
3. Global competitiveness assertion
3.1 The state of Russian competitiveness according to the Global
Competitiveness Index
ranks 66rd out of 139 countries covered by the
GCI 2010-2011 (See figure 3). The country lags behind the OECD member countries
on average (on a scale of 1 to 7, Russia achieves a score of 4.2 against 4.9
for the OECD) as well as the BIC economies (score of 4.5)8. The
country remains stable compared to the previous year, keeping the same rank.,
in the course of the past five years, Russia’s performance in the GCI stagnated
and the country remained in the 5th deciles of the GCI sample. A considerable
improvement was observed prior to the financial crisis (in the 2008-09
edition), although it deteriorated the following year.the challenges that
Russia will have to address in order to raise productivity are above all the
poorly functioning institutional framework, as it belongs to both public as
well as private institutions.addition, competition and demand conditions do not
contribute to the efficiency of goods markets to the same degree as in OECD and
BIC economies. Furthermore, financial markets trail the two comparator groups
in terms of efficiency as well as trustworthiness and confidence.but not least,
the country’s business sector is significantly less sophisticated than
enterprises in peer economies or OECD member states. The following sections of
the chapter explore in more detail the competitive strengths and weaknesses of
the Russian Federation identified by the GCI analysis as the key areas for
policy reform.can be summarized in a simple «three-plus-five formula» -
building on three strengths and addressing five priority challenges, the
Russian Federation could reap considerable productivity gains. Improvements in
these five areas by 2030 would lead to improved competitiveness by this time,
which would correspond to a significant increase in prosperity in Russia.
3.2 Russian growth in detail: exploring performance at the industry
level
productivity gap between Russia and the OECD
countries is determined by the level of productivity in individual industries
and the variation in industry structure. When we take a closer look at the
industry structure, three groups of industry sectors can be determined: basic,
supporting, and infrastructure sectors.sectors are agriculture, mining,
manufacturing, and software development-that is, those industries that produce
goods that are traded globally and therefore often face real competition. Supporting
sectors are the market sectors that either facilitate the distribution of goods
(such as wholesale and retail trade), support production (for example, business
services), or produce goods and services that can be traded only locally
(construction, real estate, hospitality, etc.). Infrastructure sectors are
non-market services and production, such as government services, education and
health, utilities, transport, and communications9.to explore growth
in the Russian economy between 2003 and 2009 according to sector groups, the
analysis shows that growth was higher in those sectors with a greater intensity
of competition (Figure 4). Productivity in supporting sectors (which are mostly
market services) grew faster than in many basic sectors (where the government
is the main proponent and owner) and in most infrastructure sectors (which are
non-market services). In basic sectors-both manufacturing and
resources-productivity grew moderately while employment declined.
Infrastructure sectors did not grow in employment, while productivity grew
slowly.
Figure 4: Productivity and employment
growth; source: Global Competitiveness Report 2011-2012
, infrastructure productivity in Russia was three
times lower than it was in OECD countries. In recent years, productivity growth
has not been realized in Russian infrastructure sectors. Furthermore, the
government share in total employment was constantly growing (Figure 5).
Figure 5: Productivity and employment in
infrastructure sectors; Source: Global Competitiveness Report 2011-2012
transformation is not occurring in any
infrastructure sector, and such fundamental change is essential for further
development of these sectors.sectors were fast growing in both productivity and
employment, with finance leading the growth (Figure 6). This sector has been,
and is still, emerging and its growth fills an «empty space» and promotes the
underdeveloped distribution function in the economy. The productivity gap in
supporting sectors remains large (47 percent of the total gap) and further
rapid growth is necessary for productivity improvements. More than half of this
gap is determined by low productivity in the labor-intensive construction and
real estate sectors. Productivity is gradually improving there but many
problems still persist.basic producing sectors in Russia demonstrated some
growth in productivity and decline in employment (Figure 8). Resource sectors
raise productivity but do not create net new jobs. Among the manufacturing
(including software) sectors, the best performing were computer activities,
fabricated metal products, and rubber and plastic.
Figure 7: Employment and productivity in
basic sectors; Source: Global Competitiveness Report 2011-2012
also grew rapidly in oil and gas refinery,
metallurgy, coal mining, food processing, chemicals (except pharmaceuticals),
tobacco, and pulp and paper. Most of these are characterized by intensive
market competition.machinery, equipment, and transport equipment, both
employment and productivity decreased. These sectors were the most seriously
affected by the economic crisis of 2008-09. The government is the most
important player in these industries.
Productivity gaps in machinery and equipment and
transport equipment account for 40 percent of the total productivity gap
between basic sectors in Russia and those of the OECD countries. Another 40
percent is the result of lower productivity in the oil and gas, mining and
refinery, chemicals, and agriculture and food sectors.are different
perspectives on the development of basic sectors. Some experts propose
abandoning manufacturing and instead using natural resource rents for the
development of sophisticated market services; others insist that industry
development, especially manufacturing, should be the highest priority.
Statistics and cross country analysis, however, show that the truth is
somewhere in the middle: manufacturing still matters for economic development
and countries create new jobs in competence-driven manufacturing.to statistics,
as countries proceed to the next stages of development, per capita
manufacturing value-added increases. This is proportional to per capita GDP.
Although it is well known that the employment share in industry tends to
decrease after some critical point, the employment decline is compensated by
productivity gains. These gains include both an increase in productivity at the
individual industry level and the shift up the value chain to sectors that
depend less on natural resources and are more competence based.
3.3 Place in the world
Russian Federation drops three
ranks to 66th position this year10. The drop reflects the fact that
an improvement in macroeconomic stability was outweighed by deterioration in
other areas, notably the quality of institutions, labour market efficiency,
business sophistication, and innovation. The lack of progress with respect to
the institutional framework is of particular concern, as this area is likely to
be among the most significant constraints to Russia’s competitiveness.the rule
of law and the protection of property rights, improving the functioning of the
judiciary, and raising security levels across the country would greatly benefit
the economy and would provide for spill over effects into other areas. In
addition to its weak institutional framework, Russia’s competitiveness remains
negatively affected by the low efficiency of its goods market. Competition,
both domestic as well as foreign, is stifled by market structures dominated by
a few large firms, inefficient anti-monopoly policies, and restrictions on
trade and foreign ownership.despite many efforts, its financial markets remain
unstable, with banks assessed very poorly (129th). Taken together, these
challenges reduce the country’s ability to take advantage of some of its
strengths-particularly its high innovation potential (38th for capacity for
innovation), its large and growing market size (8th), and its solid performance
in higher education and training (27th for the quantity of education)11.
The full information may be found in the Appendix 1., there is no doubt that
Russia is a country of great-and unrealized-potential. But despite its
well-educated population, the abundance of its natural resources and its
favourable geographical location it has not yet grown at the same pace as many other
emerging markets.
Conclusion
was proved that there is no inherent reason why
the Russian economy could not enter a period of high, sustained growth in
coming years. It has a number of structural features which create the
conditions for rapid growth: it is likely to benefit from gains in efficiency
associated with the continued elimination of remaining distortions from its
central planning past; it has an impressive natural resource endowment which is
likely to stimulate continued and growing interest among foreign investors,
particularly in the all-important energy sector. The human capital stock is on
balance, a competitive advantage, and remaining skills shortages-while sharply
limiting in many ways in the public sector-are gradually being addressed.has an
impressive tradition of world-class research in the basic sciences, including
seminal contributions to mathematics and physics. But the brain drain has been
a blow to the country’s ability to quickly move back to the outer limits of the
technology frontier. The basic machinery to do so, in the form of higher
education establishments that support scientific research, and the commitment
to excellence that was the distinguishing feature of Russian culture and
science during much of the past century will have to be revitalized.conditions
in the global oil markets suggest that the external environment is likely to
remain favourable to Russia, creating an ideal opportunity to push ahead with
structural and institutional reforms. The alternative is to pursue these in the
middle of an economic downturn or a crisis, a scenario that is traditionally
more difficult.IMF is certainly correct in suggesting that a loosening of
fiscal policy-particularly one aimed at boosting public sector wages and
pensions, not investments in education, public health, and infrastructure, all
of which would boost productivity and thus enhance the permissible level of
real appreciation of the rubble-will «strengthen tensions between exchange rate
and inflation objectives.»beyond these issues, it is put on the authorities to
broaden their focus, and deal with a broad range of emerging stresses. Foremost
among these are how to arrest the disturbing demographic trends, how to better
utilize surplus public resources to enhance the economy’s capacity for
innovation, and how to put the country back on a path of world-class scientific
and technological achievement, so that Russia may join the ranks of the most
competitive economies in the world.
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. Economic Competitiveness Rating - Russia Compared to
Continent - http://www.globalpropertyguide.com/Europe/Russia/competitiveness