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There is, once again, widespread excitement about the prospects of the Indian economy. This comes on the heel of news that India’s Q3 growth has now marginally edged above China’s, after a statistical adjustment. Can we now expect the Elephant to replace the Dragon as the motor of the world economy?

At times like these it helps to take a longer term view. Assembling GDP growth data since 1960 from the World Bank and taking a moving average of 5 years, I made the following two graphs of the longterm economic performance of the world’s two demographic giants.

The comparison does not come out well for India. It has underperformed China without break, even when China was ruled by Maoists who made Soviet central planners look like paragons of competence by comparison. (The dip at the very beginning is an artifact of the Great Leap Forward and the ensuing chaos and famine). The Licence Raj might not have exactly been a panacea either, but at least markets functioned, and that alone should have made conditions for economic growth orders of magnitude better. Even though China is now about two and a half times richer per capita than India in PPP terms, there are no signs of convergence even to this day, as India continues falling relatively behind.

india-china-gdp-growth-1965-2014

The difference is, if anything, even more profound when you adjust for population growth, which has been systemically higher in India than in China since the 1970s.

india-china-gdp-per-capita-growth-1965-2014 Will India’s growth rate eventually converge with and overtake China’s? That is almost certain, since relatively poorer countries should in theory be able to grow much quicker than richer one’s by buying/stealing knowhow. The main question is how long will it take: Will it happen in the next few years? Or a decade? Or a few decades?

Increasing numbers of economists are coming round to the view that human capital is the main, overriding determinant of economic growth. According to my own calculations, there is an astounding R2=0.84 correlation between PISA-derived national IQs and GDP (PPP) per capita amongst countries that do not benefit from a resource windfall or suffer from a Communist economic legacy. Unfortunately, India’s IQ appears to be very low, somewhere in the low 80s, so I remain very skeptical of its prospects for becoming a second China.

Still, I don’t want to come off as an India basher. There are a few factors working in its favor too. First, it’s got a very substantial “smart fraction,” i.e. it has relatively more bright people than you would expect from the standard bell curves you have in more homogenous countries. Thank the caste system for that. As Heiner Rindermann showed, smart fractions have a disproportionate effect on a country’s overall economic performance. Furthermore, Indian IQs might be even more environmentally suppressed than in Sub-Saharan Africa. India has comparable rates of malnutrition, likely worse sanitation and hyeginic standards, and more inbreeeding. All this might sound bad and it is but that likewise creates the potential for very rapid improvement, should a strong and capable hand be there to help it along.

In this respect, India is lucky to have gotten Modi.

 
• Category: Economics • Tags: China, Convergence, India, Indian Economy 
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In a new paper at the (conveniently open) journal The Winnower (h/t @whyvert), building on his earlier work, geneticist Davide Piffer has tried to calculate the genotypic IQs of various world populations, and how they compare to measured phenotypic IQ:

Piffer, David – Estimating the genotypic intelligence of populations and assessing the impact of socioeconomic factors and migrations.

Here is the abstract:

Factor analysis of allele frequencies was used to identify signals of polygenic selection on human intelligence. Four SNPs which reached genome-wide significance in previous meta-analyses were used. Allele frequencies for 26 population were obtained from 1000 Genomes. The resulting factor scores were highly correlated to average national IQ (r=0.92). A regression of IQs on genetic factor scores of developed countries was used to estimate the predicted genotypic IQs of developing countries. The residuals (difference between predicted and actual scores) were negatively correlated to per capita GDP and Human Development Index, implying that countries with low socioeconomic conditions have not yet reached their full intellectual potential.

As far I can see, the methodology is sound (perhaps apart from a few quibbles over phenotypic IQ sources). But this is exceedingly minor, and doesn’t really change anything in a material way. So I will focus here mostly on the real world impacts these findings would imply.

As one might expect, there is a gap – usually a very significant one – between calculated genotypic and measured phenotypic IQ in developing countries. This is only logical, since developing countries frequently suffer from a variety of maladies, such as malnutrition and parasitic disease load, that are almost entirely absent in the First World. These maladies have a negative impact on IQ. (To a very large extent this also explains the Flynn Effect of secular rises in IQ in the developed world. Effectively, developing nations may be considered as living in the the First World’s past).

Not good for IQ.

Not good for IQ.

Below is a table showing measured IQ in developed countries and predicted IQ from the paper.

IQ developed countries Predicted (G.wich) IQ
Vietnam 105.9
HanChineseBejing 105 104.3
HanChineseSouth 105 103.6
Japanese 105 103
Chinese Dai 102.7
British 100 100
UtahWhites 99 99.3
Finns 101 99
Spanish 97 98.1
TuscanItaly 99 97.9
Gujarati Ind. Tx 97.1
Mexican LA 95.1
Indian Telegu UK 95
Punjabi Pakistan 94.9
Puerto Rican 93.5
Colombian 92.5
Bengali Banglade 91.4
Peruvian 91
SriLankanUK 88.7
US Blacks 85 84
Mende Sierra Leo 83.7
Afr.Car.Barbados 83.6
Esan Nigeria 82.1
Gambian 82.1
Yoruba 82
Luhya Kenya 81.4

And here is another table, displaying, for peoples in developing nations, predicted IQ (relative to the standard “Greenwich mean” of 100 for the UK); 100 in the UK); the difference between the predicted and the measured IQ; and GDP per capita in purchasing power terms. They are arranged in order of the size of the phenotypic/genotypic difference.

Predicted (G.wich) IQ “Pseudoresiduals” (Predicted minus measured IQ) GDP per capita PPP (2010-2013) HDI (2012)
Gambian 82.1 20.1 1613 0.438
Mende Sierra Leo 83.7 19.7 1432 0.368
Esan Nigeria 82.1 11.1 5303 0.5
Yoruba 82 11 5303 0.5
Punjabi Pakistan 94.9 10.9 4353 0.535
Bengali Banglade 91.4 10.4 2679 0.554
Puerto Rican 93.5 10 34183
SriLankanUK 88.7 9.7 0.745
Colombian 92.5 9 11540 0.708
Luhya Kenya 81.4 7.4 2626 0.531
Mexican LA 95.1 7.1 15813 0.755
Vietnam 105.9 6.5 4851 0.635
Peruvian 91 6 10756 0.734
Afr.Car.Barbados 83.6 0.6 15324
HanChineseBejing 104.3 -0.7 10485 0.715
HanChineseSouth 103.6 -1.4 10485 0.715
Gujarati Ind. Tx 97.1
Indian Telegu UK 95

Some observations we can consequently make:

Africa: The biggest gaps are all in West Africa. Not only is the region grindingly poor, but it also has perhaps the world’s most acute parasitic disease load, thanks to the hot, humid equatorial climate and low-lying, swampy geography (which the region’s disorganized and resource-pool governments are unable to mitigate) . The gap is lower in Kenya, which as a hilly country can be expected to have a lower parasitic disease load, and non-existent amongst Afro-Caribbean Barbadians, who live in a relatively prosperous country (likely in large part thanks to its “smart fraction”) with one of the most salubrious climates on the planet. On average, it appears that their phenotypic IQ is ~high 60s and their genotypic IQ is ~low 80s. US Black IQ is given as 85, but bear in mind that they have 20% admixture with Caucasoids. (Though on the other hand, US Blacks do slightly better according to PISA, at ~88. If this figure is substituted for in the calculations, then the genotypic estimate for Africans would also rise, though not by very much). Either way, there is thus very substantial room for improvement, but even were that to happen, the overall outlook for self-sustained African convergence to developed world living standards would remain grim.

Latin America: Has a phenotypic IQ of ~mid 80s and genotypic IQ of ~low 90s. As expected, the gap is smaller than in Africa or India (Latin American countries are after all far more socially developed than in West Africa or India, albeit one should should treat straight GDP per capita figures with caution due to the massive levels of inequality). In the developed US, it is basically non-existent, what with Latinos scoring ~low 90s in the PISA tests. The big gap seen in Puerto Rico is intriguing, considering that its close economic ties with the US has allowed it to have a very high GDP per capita relative to its IQ, so lack of money can’t be a limiting factor. But in general, Latin America is already pretty much “where it should be” in terms of prosperity as implied by its level of human capital.

South Asia: Has a phenotypic IQ of ~low 80s and genotypic IQ of ~low to mid 90s. The gap is much bigger than for Latin America, – indeed, comparable to West Africa’s – which is perhaps explainable by dint of India’s greater parasitic disease load, high rates of malnutrition (which is perhaps even higher than in Sub-Saharan Africa), and, in the case of the Punjabis and Bengalis, a strong tradition of FBD marriage, which has very strong negative effects on IQ [AK edit: See also Razib's comment]. But on the whole, this is positive news. Countries with an average IQ of ~95 include Romania, Greece, Turkey, and Israel (!). If the South Asian continent could successfully resolve its malnutrition, parasitic disease load, and inbreeding issues – admittedly, no small challenge – then it could well expect to eventually rise close to southern European living standards.

Vietnam: Phenotypic IQ of 99, versus a genotypic IQ of 106. Certainly a major surprise, considering it is even higher than China. The gap is substantial, but smaller than in India or Africa. This is not surprising, since although Vietnam has the GDP per capita (PPP) of India, it is led by conscientious Communists and is much better off in terms of social development and nutrition (e.g. meat consumption per person is equivalent to that of neighboring, much richer countries). This makes its excellent performance in PISA 2012, which I wrote about in my introductory post on this site, much easier to explain. Consequently, it would also be a strike against Ron Unz’s theory of the East Asian Exception (i.e. that East Asian IQs are very resilient to negative socio-economic and environmental factors). There would still be a substantial gap between Vietnamese genotypic and phenotypic IQ; it’s just that the former are so phenomenally high that the latter can’t help but be very high as well, since Vietnam is at least in terms of social provision no longer a truly Third World country.

China: No gap. Phenotypic IQ (~105) actually higher than genotypic (~104), which is very unusual for a developing country. Here, however, I must stress two things. First of all, with a GDP per capita (PPP) of $12,000, China has already substantially passed the point at which wealth or the absence of it is a significant limiting factor to realizing genotypic IQ potential. Consult this post where I go into this in greater detail in my debate with Ron Unz. Second, I believe that 105 is, at least today, a substantial overstatement of Chinese IQ. My own estimate based on declassified PISA data is 102.5. So that’s already a gap, even if a very small one. But note also that Asian-Americans scored ~107 in PISA 2009, and Asian-Americans in the US include relatively lower IQ Thais, Filipinos, etc. If we set that as the genotypic IQ of the Han people, then there is still very substantial room for further improvement (with the consequence that the Flynn Effect really does apply very much to East Asians too).

Regardless, short of them embarking on some new Maoist adventure, or getting flooded off the world map by runaway global warming, or getting nuked, or some other similarly apocalyptic scenario, China’s and Vietnam’s convergence to at least Japan’s level is all but certain in the long run.

 
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Even a few months ago, it looked as if Ukraine had taken a significant step towards Eurasian integration by signing up as an observer to the Customs Union between Russia, Kazakhstan, and Belarus. However, in the past month, evidence is emerging that it was but a temporary ploy to appease Russia while in reality speeding up the Deep and Comprehensive Free Trade Agreement (DCFTA) with the European Union. This is scheduled to be signed in Vilnius late this November.

The Ukrainians say that that does not preclude further integration within the framework of the Customs Union. However, it is difficult to see how it could simultaneously have free trade with Europe while simultaneously being a part of strategic protectionist bloc. Although it is entirely possible that in the Customs Union will eventually be gradually merged with and into the European economic area – Putin himself has hinted as much – any such scenario will likely be decades in the making.

Putting aside for the moment geopolitical (Atlanticism vs. Eurasianism) and cultural (European civilization vs. Orthodox-Slavic brotherhood) considerations for the moment – which have been overdiscussed anyway both on this blog and Leos Tomicek’s and many others, with the result that there is now little left to add – I would like to frame the debate in economic terms.

The EU Path

As Mark Adomanis points out in his blog, most Russian claims regarding the disadvantages of DCFTA ratification at the recent Yalta summit were in fact based on technical considerations (the Russian negotiator Sergei Glazeyev’s comments on irredentism and ostensible blackmail that have dominated media coverage appear to have been offhand and taken out of context anyway).

The free trade area will make imports cheaper, but at the cost of an even greater current account deficit – Ukrainian factories aren’t likely to compete well with German (or even Czech) ones on equal terms. This current account deficit will be financed by external borrowing, which is short-term and limited due to Ukraine’s poor credit status. This means that either it will have to do a default or devaluation of some kind, so the Russian argument goes, or seek a bailout.

And who is going to provide that bailout? Russia? Of course not. As for the EU states, many of them are strained themselves, and have quite enough pasta and paella on their plates anyway. For the same reason, the generous transfers that eased the Med’s convergence with the European core in previous decades are now a thing of the past; if the Ukrainians expect freebies, they will probably be in for a disappointment. In any case, actual membership of the EU is extremely remote. In any case, the advantages conferred by the supposed “transparency” and “rule of law” that European integration brings are oft-overstated, as we have witnessed many times.

Fortunately, unemployment will be contained, if free trade is accompanied by an easing of visa restrictions; but not so much in terms of demographics, which will take a hit just as they show tentative signs of recovering somewhat. A positive side is that there might be more European investments and technology transfers, especially in western Ukraine, since countries like the Czech Republic and Poland start to become too rich to be attractive as sources of cheap, educated labor.

The EEU Path

This would integrate Ukraine with the Russian economic sphere of modest protectionism coupled with an industrial policy aimed at reviving Soviet mainstays such as the aircraft indistry as well as delving into new spheres like nanotechnology. The technological level of Russian industry isn’t substantially higher than Ukraine’s, and furthermore, the latter’s will receive a boost in the form of lower energy prices; as such, there will presumably be no big threat of many factory closures or unemployment spikes. As such, in the short-term and medium-term, it is clearly preferable to the EU path.

In the long-term, that depends on your view of whether Russia’s own modernization path is sustainable or not, and also perhaps on whether the Customs Union / EEU is destined to merge with the EU in some way. But those are entire debates on their own.

Sitting on the fence?

It’s interesting to note that that the DCFTA is pushed for by a government whose electoral support is rooted in the Russophone east and south – indeed, one which is frequently accused of being a stooge of Russian imperialism.

The Party of Regions isn’t a stooge of Russian imperialism. If it is a stooge of anyone, it is of the Donbass heavy industrial oligarchs. The interests of those oligarchs are clearly mixed. On the one hand, many of their factories will no longer be profitable under conditions of free trade and regulatory convergence with Europe. On the other hand, they will get a chance to increase their status and long-term security by merging with the transnational oligarchy based around London and New York. As for electoral strategy, the choice to pursue the European vector is… downright curious. For it is its own electoral heartlands that free trade with Europe will hammer the most, especially in the short and medium term. Are they hoping that their voter base wouldn’t connect the dots?

This is why it’s difficult to say right now whether the Ukrainian elites as a group (including the oligarchs who fund PoR) have made a definitive choice to integrate with Europe – or whether it is merely continuing its very old game of playing off both sides against the other in return for concessions. Still, if I had to guess, I’d go with the former. The “civilized” West has a ineluctable charm to many overly idealistic citizens in the former Soviet Union that is not often appreciated by Westerners themselves. This charm transcends both reason and the realistic observation that many civilized Westerners themselves don’t reciprocate those warm feelings, and certainly don’t consider Ukrainians (or Russians – though at least Russians don’t tend to have quite as big an inferiority complex on this) to be civilized Europeans. What else could explain PoR taking a course that will probably end up majorly shafting their own electoral base *and* (at least in part) the oligarchs who fund them?

(Republished from Da Russophile by permission of author or representative)
 
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See data. For real, this time.

russian-gdp-overtakes-germany

While it is perhaps a big strange to start thinking of Russia as a high-income economy, it’s not so surprising when looking at concrete statistics such as vehicle consumption, Internet penetration, etc. – all of which are now at typical South European and advanced East-Central European levels (even if there’s still some way to go to converge with the likes of France or the US).

In per capita terms, this means that the average Russian is now about as rich in terms of real goods he can buy on domestic markets as a typical citizen of Portugal, Greece, Estonia, Poland, or Hungary (though with the caveat that most of the latter places have a lot less income inequality). Below is a table showing the GDP per capita, PPP (current international $) of Russia and comparable countries:

2008 2009 2010 2011 2012
Czech Republic 25,885 25,645 25,300 26,209 26,426
Portugal 24,939 24,892 25,547 25,586 25,305
Slovak Republic 23,210 22,546 23,149 24,112 24,896
Greece 29,604 29,201 27,539 25,859 24,667
Russian Federation 20,276 19,227 20,770 22,408 23,549
Lithuania 19,559 16,948 18,120 21,554 23,487
Estonia 22,065 19,470 20,092 21,996 23,024
Chile 16,435 16,190 18,607 21,001 22,655
Poland 18,021 18,796 20,036 21,133 21,903
Hungary 20,432 20,249 20,734 21,455 21,570
Latvia 18,090 15,928 15,944 19,103 21,005
Croatia 20,215 19,158 18,546 19,817 20,532
Turkey 15,178 14,578 15,965 17,242 17,651
Brazil 10,393 10,357 11,187 11,634 11,909
China 6,202 6,798 7,569 8,408 9,233
Ukraine 7,311 6,312 6,691 7,215 7,418

Furthermore, it’s looking as if Russia might have a real chance of overtaking Portugal next year. Just as Putin promised in 2003! (Double GDP; overtake Portugal in 10 years). But even if that fails, at least overtaking Greece is all but assured, so even if Russia misses out on Portugal it will still get to say it is no longer the poorest “proper” European country.

(Republished from Da Russophile by permission of author or representative)
 
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The latest US-Russia.org Experts Panel discussion was about Russia’s burgeoning partnership with China. I especially recommend Mercouris’ contribution which – although unfortunately titled by VoR’s editorial staff)) – is otherwise quite brilliant. My own effort follows below:

First of all, let me preface that I’m one of the biggest China bulls around. Its economy in real terms will overtake that of the US by the mid-2010’s, if it hasn’t already. It’s already bigger in a range of industries, from traditional heavy industry (steel, coal) to consumption (car sales, e-commerce). Its manufacturing wages have caught up with Mexico’s, which is a quintessential middle-income country. If the average Chinese is now about as prosperous as the average Mexican, then the PRC’s total GDP – taking into account its vast population – is now well ahead of America’s.

Nor is it a house build on sand, as many Sino pessimists would have you believe, but on solid, steel-reinforced concrete. Its economic growth is NOT dependent on cheap exports. And fantasies about its “exploited” cheap labor force, which will become increasingly uncompetitive as it develops, belie the fact that the average Chinese now scores higher in international standardized tests than the OECD rich country average. Given the centrality of human capital to economic growth, China’s rise to the top tables of world power is all but assured.

It would be very worrying if China’s ascent was accompanied by the bellicose rhetoric and militaristic posturing adopted by other rising Powers of the past, like the Kaiser’s Germany. But “yellow peril”-type hysteria aside, this does not seem to be the case. China spends a mere 2% of its GDP on its military, i.e. about twice less in proportional terms than both Russia and the US. This is a most fortunate confluence of events, especially for Russia, as competing with China is unrealistic in the long-term – not when its economy is an order of magnitude bigger. On the other hand, deep engagement with China hold out a number of benefits.

First, China gets access to Russian energy resources, bypassing the vulnerable routes past the Strait of Malacca (either overland via Siberia, or across the top of the world via the thawing Northern Sea Route), while Russia gets access to Chinese capital and technologies – much of the latter purloined from the West, true, but so what? Second, both countries secure their frontiers, allowing them to focus on more troubling security threats: The Islamic south and possibly NATO in Russia’s case, and disputes with Vietnam, Japan, and a USA that is “pivoting” to the Pacific in China’s case. Third, resources can be pooled to invest in Central Asia and root out Islamist militants and the drug trade – an issue that will assume greater pertinence as the US withdraws from Afghanistan.

Frankly, the West is too late to the party. It had an excellent chance to draw Russia into the Western economic and security orbit in the 1990’s, but instead it chose the road of alienation by pointedly welcoming in only the so-called “captive” nations of East-Central Europe. Putin’s reward for his post-9/11 outreach to the US was a series of foreign-sponsored “colored revolutions” in his own backyard. While in rhetoric both he and Medvedev continue to affirm that Russia is a European country, in practice attitudes towards them have come to be based on practicalities, not lofty “values” that they don’t even share. So it is only natural that with time Russia came to be more interested in pursuing a relation with the BRICS (“The Rest”) in general, and China in particular.

The West’s response hasn’t been enthusiastic. The BRICS are written off as a bunch of corrupt posers with divergent geopolitical ambitions that will stymie their ability to act as a coherent bloc. Russia and China come in for special opprobrium. While there’s a nugget of truth in this, it misses the main point: The BRICS might be poorer but by the same token they are growing faster and converging with the West, or at least China and Russia are; and while they don’t see eye to eye on all things, they agree on some fundamentals like multi-polarity, a greater say for developing nations in the IMF and World Bank, and the primacy of state sovereignty.

Here is a telling anecdote from an online acquaintance of his recent experiences with the European news channel, Euronews: “A feature of this site is that there’s a world map with happy and sad smileys on it to indicate good news and bad news. And there on Moscow I spotted a sad smiley, so I focused on it, thinking there would be a report on the already day-old and forecast to last another day blizzard that is raging right now across the Ukraine and European Russia… And the “bad news” that I read? The meeting between the Russian president and his Chinese counterpart together with a report and an analysis of the increase in trade between those two states. That’s really bad news, it seems, for some folk.”

And this is not so much an isolated incident, but a metaphor for the general state of West – Russia relations: While the former expects a certain degree of respect and even submission from the latter, it doesn’t tend to make reciprocal gestures, and then acts like a jilted lover when Russia gives up and goes to someone else’s bed. But that’s the reality of a globalized world, in which the West isn’t the be all and end all, and countries have choices. It is high time that the West mustered the humility to finally accept that it has been dumped.

(Republished from Da Russophile by permission of author or representative)
 
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One of the most reliable indicators of influence is access to cars. They are the standard symbol of affluence and middle-class status the world over. They are also far more understandable at the everyday level than things like the PPP GDP per capita, or the number of burgers your national McWage will buy.

Following on my last post, which focused on production, let’s now examine another indicator: The number of cars bought in any given year per 1,000 people.

auto-sales-russia-cee

As we can see from the graph above, Russians (22/1,000 as of 2012) are now buying more new cars per person than any other Central-East European country. Now, this is NOT to say that they are richer than the Czechs (18/1,000), or even the Poles (9/1,000) and Estonians (18/1,000). The latter countries’ markets are already substantially saturated and close to Western levels of auto ownership, while Russia still has some catching up to do; furthermore, they don’t have tariffs on imported second-hand cars, whereas Russia’s are quite substantial. It is also probably true that on average Czechs buy higher quality and more expensive cars than Russians. Nonetheless, the difference between Russia and countries like post-crisis Latvia (7/1,000) and Hungary (7/1,000) are now so wide that it’s hard to argue that the latter are still substantially more prosperous.

auto-sales-russia-and-other-countries

The difference is of a similar magnitude to today’s Greece (6/1,000), in the wake of its economic depression – and has also gained on other countries that were part of developed Europe but hard-hit by the crisis like Spain (17/1,000), Portugal (11/1,000), Ireland (20/1,000), and Italy (26/1,000). In a very real sense, the fact that ordinary Russians can now more readily afford relatively big-ticket items like automobiles than citizens of some countries long considered to be past of the developed world is quite a momentous affair. In fact, not only are they being overtaken by Russia, but by Brazilians (20/1,000) and the Chinese (14/1,000) too, even if the last BRICS member India (3/1,000) continues to be mediocre. That said, there is still a very considerable gap between Russia and the truly front-tier countries like Germany (41/1,000) and the US (47/1,000).

(Republished from Da Russophile by permission of author or representative)
 
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In the wake of Russia’s Internet penetration breaking the 50% mark (now – 55%) and overtaking Germany in total number of users last year, we now have news that Russian overtook German as its second most popular language. It is used on 5.9% of all the world’s websites. It is projected that Russia will maintain this position for a few years. Also .ru has become the world’s most popular country-level domain.

internet-most-popular-languages

This is quite a remarkable achievement considering Russia’s limited number of Internet users relative to the much more populous Spanish and Chinese speaking worlds (even if Internet penetration in the latter regions is a bit lower). I wonder why that could be the case? One theory is that Latin Americans simply don’t read much, while creating websites in China may be trickier than in the West because of greater controls over the Internet. (Also hanzi are much more space-economical than alphabet-based writing systems, so what might take a few pages in English may only require one page in Chinese; that is another possible explanation). That would also explain why the world’s less than 100 million native German speakers are also far ahead of those far more numerous nationalities. Alternatively, maybe there’s simply more spam blogs or pages hosting copied content in Russian.

Here is a trends graph. As of March 27 (the date of this article), Russian has clearly at 5.9% edged past German which is now at 5.7%.

(Republished from Da Russophile by permission of author or representative)
 
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My latest for VoR and US-Russia.org on Russia’s recent Foreign Policy Concept:

The new foreign-policy concept is a long-overdue adjustment to international realities. There can be no meaningful “strategic partnership” between Russia and the US or indeed Russia and the West in general, when their respective core values have diverged from each other so much.

Ironically, this divergence has occurred at a period in history when Russia has retreated from ideology; it now embraces a doctrine of national sovereignty and moderate social conservatism that a generation ago would have made it part of the European mainstream. But today it has been “left behind” as the West has moved on to democracy fetishism and pushing concepts such as gender feminism and criticisms of “heteronormativity” that sound alien to most Russians. Hence the disconnect between Russia and the West on a whole host of issues, from the Arab Spring to the Pussy Riot affair.

So even as Russia converged with Western civilization of the 1970′s, the West – in particular its Anglo-Saxon, Scandinavian, and Gallic constituent parts – has “transcended” itself, and we are again left with a gulf of mutual incomprehension as deep as in Soviet times. As such, the best that can be realistically hoped for, at least in the medium term, is mutually beneficial economic relations (i.e., oil and gas in exchange for machines and modernization). Anything “deeper” or more heart-felt will require cultural concessions on the part of either Russia or the West, and it is unclear how that could be made to happen even were it to be acknowledged as desirable in and of itself.

Given these cultural clashes, it is probably a good thing for relations to become more defined by markets, which peace theorists believe have a moderating effect on animosity and inter-state conflict. Fortunately, prospects in this sphere are good, the specter of the Great Recession notwithstanding. Russia’s GDP per capita in purchasing power parity (PPP) terms is now well above half the EU average and close to convergence with the likes of Portugal and Greece. Russia has joined the WTO, and will probably join the OECD in another year or two. De Gaulle’s vision of a unified space – at least in the economic sphere – from Lisbon to Vladivostok has a real chance of coming into being within the next decade.

China doesn’t see eye to eye with the West either culturally or geo-politically, but it too is rapidly converging with the developed world; wages in its manufacturing sector have recently surpassed Mexico’s. It is now for all intents and purposes a middle-income country, and its GDP in terms of PPP may already have overtaken America’s. Opting for a closer relation with China is a wise play on Russia’s part. Its economic dominance in one or two more decades is all but assured, and with an (economistic, non-ideological) exploitation of high-speed trains and the melting Northern Sea Route, Russia can make a fair bit of money by being a “bridge” to the Orient.

(Republished from Da Russophile by permission of author or representative)
 
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As I write the book, I create a lot of graphs. Here is one of them.

russia-automobile-production

So in manufacturing terms, as far as cars are concerned, the “deindustrialization” era is decidedly over.

Of course it’s also important to note that in 1985 they were producing this whereas today they are producing this as well as various foreign brands. Plus for every two cars produced and sold in Russia today, one is imported, for total yearly sales of 2.9 million in 2012 (about the same as in Brazil – 3.6 million, Germany – 3.3 million, and India – 2.7 million).

(Republished from Da Russophile by permission of author or representative)
 
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By the usual standards of Guardian reporting on Russia, this one by GQ Russia editor Andrew Ryvkin is… well, about par for the course.

Citing a recent PwC report that Russia will overtake Germany to become Europe’s biggest economy in 2030, he asks, “Should we believe them?

Well, the PwC is just repeating predictions made almost a decade earlier by Goldman Sachs, which has thus far proved very accurate on the growing prominence of the BRICs in general, and of Russia in particular (regardless of repeated attempts to kick it out of that grouping, against the judgment of Jim O’Neill, the inventor of the BRICs concept himself).

So in effect Ryvkin is asking us whether we should trust a range of organizations with a great predictive record on the issue to the uninformed ravings of a Guardian hack.

Forget Russia’s very reasonable and respectable growth rates compared to the other Central-East European countries. According to Ryvkin, Russia’s downfall will be because it is “politics”, and not “strict economic policies”, that “rule these wintry lands.” What is the primary example he uses to demonstrate this?

One should also have sedatives close to hand while reviewing the figures. Russia has become one of the most corrupt countries in the world, and is barely making an effort to hide it. For instance, one of the Sochi 2014 Olympic projects – a 50 km road – costs nearly $8bn.

This meme was popularized by Julio Ioffe in the Western press on Russia back in 2010. It has also long since been long debunked, including on this very blog – although it continues to float around as a cliche among Russian liberal and journalist circles.

The only problem with looking at Russia through this failed state prism, without bothering to corroborate sources, is that in no sense can the Adler-Krasnaya Polyana route be described as just a “roadway”. Intended to be completed within 3 years in an area with a poorly developed infrastructure, this so-called “road” also includes a high-speed railway, more than 50 bridges, and 27km of tunnels over mountainous, ecologically-fragile terrain!

Then there’s this bizarre statement: “Germany, is currently associated with its policy of austerity, Russia is known for precisely the opposite.” That’s certainly news to me, as Russia has run balanced budgets for the past 2 years* – in stark contrast to, well, pretty much the rest of the developed world (including Germany for that matter).

And here you’re inevitably faced with a question: how would the Russian government act if it became a leading European economy and faced a crisis like the one in we have now in the eurozone, considering that this government has allowed the construction of a $160m/km road?

That is an extraordinarily remote possibility, seeing as Russia has fiscal unity and no significant sovereign debt (i.e. the lack of which define the European crisis). The very question is not only based on a faulty premise (the so-called “caviar road”) but essentially meaningless.

After some of the usual moralizing and content-free platitudes about the absence of Russian democracy, as well as the further extremely bizarre idea that the Chinese economy is not politicized like Russia’s**, Ryvkin wanders back on track with the usual spiel about how Russia is Nigeria with snow.

Here’s a question: who would want a Russian-made car, when even Russians don’t want them? Another one: who wants to fly Russian aeroplanes, when even in Russia people choose to fly on a Boeing or Airbus? But these huge industries still exist, resembling Frankenstein’s monsters of Soviet industrial might, brought to life by heavy injections of oil money and created by businesses that ultimately cannot produce a competitive product.

It goes against almost every aspect of economic, market-oriented logic, but it has nothing to do with the economy, because it aims to keep the workforce loyal to the government and project an image of a neo-Soviet industrial power. So is securing votes at the cost of your country’s economic development today a strategy worthy of someone who is going to lead the European economy in seventeen years? Is the strategy even smart?

Back in the world of hard facts and statistics, Russian car production was at 2.0 million units in 2011 (increasing by a further 15% in 2012) compared to 1.2 million units in 2000. Many foreign automakers have moved manufacturing into Russia, but that one presupposes is a good thing; that indigenous Russian brands haven’t done as well doesn’t mean much (which British brands are doing well apart from Rolls Royce?). There are few countries in which automobiles are a major export staple – incidentally, China with which Ryvkin incessantly compares Russia with isn’t one of them – and there is no good reason to expect Russia to become a major exporter of cars under any government, be it Putin’s or “even [a 10-year-old] (as long as he was smart enough not to stop the flow of oil and gas).”

That is because hydrocarbons are Russia’s comparative advantage, a concept which likewise explains why say Australia and Norway do not export much manufactured goods either. Ironically, the surest way to solve this “resource dependency” would be to get Ryvkin’s 10 year old President to ACTUALLY stop the flow of oil and gas.

That is also the reason why Ryvkin doesn’t work as an analyst at PwC but writes articles for the Guardian.

* Actually latest estimates show that 2012 had a deficit of 0.02% of GDP, but that’s of course basically a rounding error.

** Where to even begin here? For a start, consider the fact that the HQ’s of all the major Chinese companies have a “red machine” with a telephone link to Party functionaries

(Republished from Da Russophile by permission of author or representative)
 
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One of the most common arguments made to explain why Russians don’t finally overthrow the evil Putin in a bloody bunt is that they are brainwashed by the regime’s TV propaganda stations.

This isn’t actually very accurate at all. Russian TV isn’t any more propagandistic than in the West, and on some issues, less so; but that is for another time.

The more relevant issue that is presupposes that there few Russians have means of accessing the “free information on the Internet, which even Western propagandists acknowledge is not controlled in Russia. But today this is no longer actual, as revealed by this history of polls on Internet penetration from FOM.

As you can see, Internet penetration in Russia as of Spring 2012 went over the 50% mark. Those people can read all the Navalny, Snob and Echo of Moscow they want to.

Of those 51%, a much larger proportion access the Internet daily as opposed to the several years ago.

Internet penetration is at basically developed country levels of 70% in Moscow and St.-Petersburg, and in Med-like 50%’s in other urban areas.

The most “connected” regions lead only by 2-3 years.

Finally, a graph of Russia Internet penetration compared to developed countries (Germany, the US, Italy, Greece); BRIC’s; and Ukraine. A few interesting observations can be made:

(1) Internet penetration in Russia increased at very rapid rates throughout the 2000′s.

(2) They have now almost caught up with those of Greece and Portugal, and lag Italy by just 2-3 years. The US and Germany however both reached Russia’s current Internet penetration rates a decade earlier.

(3) Ukraine has the same Internet penetration rate in 2011, at 31%, as did Russia’s rural areas in the same type period – or Russia as a whole in 2009.

(4) Not related to Russia as such, but pertaining to one of the themes over at AKarlin, China is head and shoulders above India.

(Republished from Da Russophile by permission of author or representative)
 
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Just to hammer down the myth of Russian impoverishment one more time (with the help of graphs from Sergey Zhuravlev’s blog)…

In the past few years, in terms of basic necessities (food, clothing, housing) Russia has basically (re)converged to where the Soviet Union left off. Here is a graph of food consumption via Zhuravlev. At the bottom, the dark blue line is represents meat; the yellow, milk; the blue line, vegetables; the pink line, fish; the cyan line, fruits and berries; and azure line, sugar and sweets. At the top, the purple line are bread products, and the dark blue/green line are potatoes.

Meat consumption has essentially recovered to late Soviet levels, although it still lags considerably behind Poland, Germany, and other more prosperous carnivorous cultures. Milk fell and hasn’t recovered, but that is surely because it was displaced in part by fruit juices and soft drinks (which isn’t to say that’s a good thing – but not indicative of poverty either), and the fall in sugar consumption is surely a reflection of the near doubling of fruit consumption. We also see that bread and potato consumption peaked in the 1990′s, especially in the two periods of greatest crisis – the early 1990′s, and 1998. This is what we might expect of inferior goods like bread and potatoes.

There is a broadly similar story in housing construction. The chart left shows the annual area (in m2) constructed by 1,000 people. As we can see, after holding steady from the mid 1950′s to the late 1980′s, it more than halved by the late 1990′s; since then, however, construction has recovered almost to Soviet levels, the recent crisis barely making a dint.

Note that during the Soviet period, however, there were tons of peasants migrating into the cities, whereas today the urban population is more or less stable (after having declined by about 5 million). In general, mass housing construction once it got started in the 1950′s was one of the overlooked but significant achievements of the Soviet era – this, along with population migration controls, allowed urban Russia to avoid the slums you see even in relatively rich Third World places like Mexico or Thailand today. Nonetheless, apartments were cramped, and there were long waiting lines; while prices might be high today, the rationing in the Soviet period was just as real – it just took the form of scarcity and long queues. Today a big chunk of the new construction involves knocking down and replacing the Soviet-era housing stock with better buildings.

As shown in the graph above, also compiled by Sergey Zhuravlev, Russian consumption of food products, meat, fish, milk, and fruit was by 2008 essentially equal to US and West European levels. (Consumption of tobacco and alcohol is unfortunately significantly higher). But spending on clothing, housing, furniture, healthcare, transport, holidays, and restaurants is below 50% of US levels, even after accounting for price differences. (The situation vis-a-vis Western Europe is slightly better). On the one hand, this means that whereas Russians now have full bellies, the country still lags on life’s perks and luxuries – most especially on restaurants and holidays. On the other hand, it may well presage strong growth in the years to come.

The final graph shows the housing area constructed in 2012 per 1,000 people (red, upper axis), and the total number of apartments built per 1,000 residents (green, lower axis). Much maligned Belarus emerges as the star performer, building more housing than any other country listed. Whatever one’s thoughts on Lukashenko’s rule but this along with its (surprisingly good) overall relative economic performance should give one pause before insisting on privatization and deregulation as a sine qua non of socio-economic development. Russia is second after Belarus, followed by Kazakhstan; Poland; Slovakia; Denmark; Uzbekistan (also a socialist economy albeit a very poor one); Azerbaijan; Ukraine; Hungary; Estonia; Latvia; Armenia; Bulgaria; Lithuania; Moldova; Kyrgyzstan; Tajikistan.

This is part of a long list of basic indicators on which Russia in the past few years on which Russia has either caught up with (e.g. life expectancy) or far exceeded (e.g. automobile ownership) Soviet levels.

(Republished from Da Russophile by permission of author or representative)
 
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The map below shows the shifting location of the world’s economic center of gravity. It was compiled by McKinsey and reproduced by The Economist.

All is broadly as one might expect. In pre-industrial times, the world’s economic center of gravity was always basically triangulated between India, China, and the Roman Empire (later North-West Europe). By 1913, the US had became a significant world power, and in mid century it had drawn the center of gravity out into the North Atlantic. Since then the rise of the USSR, Japan, and then China, SE Asia, and India, started shifting the ball east and south at an accelerating pace. Today the speed of this transition is 140km per year. So there you have it: A cartographic representation of The Rise of the Rest.

By 2025, as shown on the map, the ball will be located somewhere in the Altai Mountains of Siberia. After that it will probably take a small dip south as India starts becoming much more prominent. Eventually however it will start going north and west again as the Arctic opens up and countries like Russia and Canada start growing much more rapidly as the century draws to a close. The cycle will retrace its ancient path.

(Republished from AKarlin.com by permission of author or representative)
 
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scylla-charybdis-and-me Contrary to what some might try to take from my post on the longterm failure of the Soviet economy, I am not an anti-Soviet ideologue. I loathe lies about its achievements and the blanket condemnations directed its way by moralistic poseurs every bit as much or more than I detest reality-challenged attempts to paint it off as some kind of utopia or at least superior to alternative paths of development.

After communists, most of all I hate anti-communists. – Sergei Dovlatov, Soviet dissident.

On the latter point, I especially notice a tendency to ignore wider historical and comparative context. In the crudest cases, Russian literacy rates and GDP are compared with those of the Tsarist era: Yes, of course the average Soviet citizen c.1980 lived far better than the average Russian citizen in 1913, but then again, so did the average citizen of EVERY OTHER European country. The more important question to ask: Would the average Russian have been better off had the Russian Empire continued on its natural development trajectory without the distortions of Stalinist central planning? Yes, he almost certainly would have, as per comparison with, say, Finland (the sole part of the Empire that didn’t go Communist), or even the Mediterranean periphery nations.

Alternatively, they say that the USSR nonetheless managed to be richer than the “Third World”, as if that was some kind of achievement. Of course it was not, as (1) they were much less advanced than the Russian Empire even in 1913, and (2) their low national IQ’s would have precluded, and continue to do so, convergence with the rich world anyway; a weakness that Russia *doesn’t* suffer from. But the evidence is simply too overwhelming to be deniable: China; North Korea; Cuba; to a lesser extent, the ex-Soviet countries and Eastern Europe – all these nations, which have little in common except insofar as they suffered from the scourge of Communist economics, are ALL glaring and consistent downwards exceptions to the otherwise remarkably tight correlation between levels of national IQ/human capital and GDP per capita. (Of course a further problem here is that hardcore Soviet apologists tend to be cultural Marxists and deny Human Biodiversity and intelligence theory).

They plead special circumstances, e.g. that the USSR was encircled, and it suffered from wars, crises, etc. But the USSR was far from alone from being wracked by catastrophe during the 20th century – in fact, quite a few of them were self-inflicted, like the Stalinist famines – and (to its credit), it remained stable and recovered quickly from shocks, unlike many developing capitalist countries. (E.g., lost WW2 industrial output was restored by the late 1940′s). As for the sums it spent on the military, this was a reason but not the main reason why the Soviet economy became sluggish and living standards stagnated from the 1970′s, at a level that was far beneath that of the advanced world (regardless of whatever absurd anecdotes commentators like Kirill or Leon wish to recount).

That said, I equally despise ideologized LIES about the USSR, which tend to come most prominently from Russophobe Westerners and their liberal compradors in Russia: That it shares responsibility for WW2 with Nazi Germany; that it “drowned” the fascist invaders with bodies (there is a whole host of myths on that front, most of which were initially advanced by retired Nazi generals); that the Holodomor was a genocide against Ukrainians (it was a manmade famine enabled by ideological zeal, and remarkably comparable to the Irish Famine); that the Soviet space program was run by German scientists; that the Soviet system was doomed to collapse; that the Communists killed 70 million people (in reality about 2mn executed or died in camps, and a further 5mn in manmade famines – which is STILL horrible, lest critics accuse me of apologetics, especially when one considers that the most severe late Tsarist era famine happened in 1891, in which half a million people died).

I also consider Andropov to have been the best of the Soviet leaders, and am of the opinion that on balance it would have been better had the USSR not collapsed and instead reformed itself while maintaining political unity (though in practice, again contrary to pro-Soviet propaganda, this was a very hard if not impossible task in the conditions that had developed by the late 1980′s). Despite not having really lived there I very much REGRET the Soviet collapse; for a start, I would not have become a rootless cosmopolitan slouching about foreign countries, and more generally the new democratic and “independent” Russia would not have been pushed about and bullied by the West, which contrary to its democracy propaganda only truly respects the fist. If I were really the anti-Soviet ideologue some people insist on painting me as, would I have made SEVEN out of the 50 (14%) of my article on Russophobe myths directly tied to clearing up misconceptions about Soviet history? Would I have translated the controversial textbook by Filippov, which was smeared as Stalinist by various liberal ideologues and Russophobes?

Of course, there are also polarly opposite ideologues who consider me a Stalinist or Soviet apologist, such as La Russophobe and Economist “journalist” Edward Lucas and his various Balto-fascist minions. They hardly deserve mention. After all if I was this sovok diehard would I bother doing stuff like translating this article which is largely anti-Soviet by Estonian writer Jaan Kaplinski?

My only real sin is being objective, radically ambiguous, not taking sides, etc., and for this I come under assault from everybody – the liberals, the PC brigade and cultural Marxists, the traitors and compradors, the Russophobes Western and Russian, Western chauvinists, the hardcore Stalinists, the Communists, the monarchists and white nationalists, and what’s worst in my view, the Russian “patriots” who think Stalin and/or the USSR in general were the best thing since vodka. That is because many of the above are actually viciously intolerant fascists if not in name then in spirit. Those thugs will never shut me up!

Nonetheless, for all the lively discussion the recent post on the Soviet economy generated, I have taken the strategic decision to henceforth place all my commentary on Russia that is not more or less directly involved with this blog’s sub-header – “Exposing Western myths about Russia” – at my other blog AKarlin. That blog will be for controversial, original, etc. comment on Russia that will at times not jive well with DR’s theme. This blog will be exclusively about specific Russia myths, exposes of lying journalists, Russia-related translations, telling statistical charts, etc.

EDIT Jan 29, 2013: I have moved taken the above paragraph to heart and transferred the post from DR to AKarlin, where you are now reading it.

(Republished from Da Russophile by permission of author or representative)
 
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Many Communists, leftists, and even patriots (I’m sorry to say) have a pronounced tendency to make out the Soviet economy as not quite the resounding failure it really was – or even to paint it as a success story that was only brought down by perestroika and liberal reforms.

The above chart – based on historical GDP per capita (Geary-Khamis 1990 Int$) by Angus Maddison, compiled by liberal economist Illarionov, popularized online by Lopatnikov, and Starikov – purports to destroy two “myths”: That of (1) Prosperous Tsarism, and (2) The ineffectiveness of the Soviet economy. After all, the average Russian went from being 40% as rich as the average American in 1885, to only 23% by 1917; whereas during the Soviet period, despite the turmoil of two major wars, Russian incomes reaches a relative peak at 40% of American levels during Brezhnev’s “stagnation” period.

These is however a glaring hole in this logic, namely that (1) relatively slow growth under late Tsarism reflected a permanent state of affairs, as opposed to the heavy but temporary burden of a large rural, illiterate population; and (2) that a level of per capita GDP that is a mere 40% of what Americans enjoy was in any way a fulfillment of Russia’s potential during the 20th century. In fact, graphical comparison with other countries shows this to be almost certainly false.

I replicated the graph comparing Russia’s historical performance relative to the US, but adding in another reference – those south European countries that were broadly comparable to Tsarist Russia in terms of economic development at the turn of the century (i.e. both were backward), but were spared from the distortions of central planning. (I could only find figures for the Russian Empire/the USSR as a whole, not Russia specifically, hence the slight disparity from the first graph; but the trends would remain the same). You can click on the graph to view it in higher detail.

On examination, several things became clear:

(1) While it is true that Russia was losing ground relative to the US under late Tsarism, or at least until 1905 (see first graph) – the same was true for all other backward European economies. In fact, the Russian Empire tracked Portugal almost exactly. But bear in mind that Russia in 1870 was 90% rural and illiterate, a state of affairs utterly nonconductive to industrial development; and agriculture’s potential for productivity gains is extremely limited, especially in the context of the system at that time. In contrast, the US was almost universally literate and embarking on its great industrial boom. It is no wonder then that the relative gap between the US and Russia increased from 1870 to 1905 (why the gap existed in the first place can be traced back centuries and is far beyond the scope of this post). Notice that the same thing was happening in all the other similarly backward countries: Portugal, Spain, Ireland, to a lesser extent (but more developed) Italy also all lost ground to the US from 1870-1913.

(2) The Soviets inherited Tsarist infrastructure, hence the period until 1925 was simply one of restoration. It should also be noted that the literacy rate by 1916 was around 50%, i.e. in terms of human capital development, much of the legwork had already been done; that is, the country was ALREADY ripe for a faster rate of industrialization, that would have happened regardless under any political regime. Nonetheless growth began to flag by the late 1920′s, as Tsarist-era production levels were restored. It was only further turbocharged from 1930 on by forced savings via collectivization and consumption repression, and German and American investment. But even so note that the sharp rise in the early 1930′s was in large part an artifact of the Great Depression that wracked the US, and that in that period ALL countries rose upwards, and that the USSR failed to make substantial gains on the US standard of living following the mid-1930′s; indeed, Soviet GDP actually fell in 1940. Needless to say this growth was also achieved at much higher human cost than elsewhere.

(3) Everybody suffered from the wars and the collapse of trade during the 1940′s. The USSR did start recovering earlier, showing strong growth relative to the US during the 1950′s and to a lesser extent during the 1960′s; it also held its own against what were still the weakest West European economies, that is Portugal, Greece, Spain, and Ireland – although Italy sprinted far ahead. The fast growth during this period was structurally similar to the US some fifty years prior: The large-scale shift from agriculture to industry, which is a one-off in historical terms.

(4) Once this process started exhausting itself by the 1970′s, relative growth flat-lined at a base only 35% of America’s (or slightly more than 40%, taking into account only the RSFSR). By 1990, it dipped below 30%. Note that it is a linear downslope from 1975, well before perestroika or “reforms”. From 1970 a sharp gap began to develop with Portugal, Greece, Spain, and Ireland; by 1990, for instance, the weakest of this group, Portugal, was at 50% of US GDP per capita. European nations that a century ago were overwhelmingly rural, undeveloped and superstitious just like the Russian Empire had now pulled decisively ahead of Soviet Russia; during the 2000′s, Ireland briefly almost converged with the US! While as we all know, during the 1990′s, the Russian economy fell into a precipitous collapse…

(5) Yes, on the one hand, this collapse wouldn’t have happened had the USSR retained political authority and central planning. On the other hand, there does not appear to be any good reason that the USSR should have experienced a productivity spurt relative to the US; if anything the reverse as demographic prospects were deteriorating by the 1980′s (especially the pool of surplus rural labor was drying up) and resources for higher investment rates were hard to find (due to the demands of the MIC, and falling oil prices). Indeed, Goskomstat planners in the late 1980′s assumed growth to the end of the millennium would be around 1.5% per annum, i.e. even further decline relative to the US. In the big picture, Russia exchanged a very punishing transitional depression for the prospect of normal market growth, which has predominated since 1998, and the longterm possibility of real convergence.

fennoscandia-russia-gdp-usa-compared

Another interesting set of countries Russia can be compared to are Fennoscania, though with a word of caution – Sweden, Norway, and to a lesser extent Finland were in literacy (human capital) terms far ahead of the late Russian Empire. Note that Finland, relatively backward nonetheless, declines more relative to the US than its Nordic neighbors; again, presumably a function of its initial backwardness (highly rural, can’t grow fast). Its performance in the 1930′s is every bit as impressive as Russia’s, and unlike the USSR, it continues to rapidly converge with US living standards from the 1960′s onwards. Note that Finland was only a modestly richer subject of the Russian Empire in 1913 than the national average.

russia-gdp-historical-compared

The final graph shows Russia’s historical performance relative to the US, Finland, Greece, and Portugal all in one. It is particularly telling that plotted against Finland, it is a story of almost inexorable decline during the Soviet period. While Russia did makes massive gains vis-a-vis Portugal and Greece under Stalinism, both the latter grew far more quickly during the 1950′s and 1960′s, with the result that they overtook the USSR in per capita terms at around 1970 and held a substantial lead by the 1980′s. This substantial gap became an awning abyss during the catastrophic nineties, however it is important to emphasize that the economy of the 1990′s was for the most part still a continuation of (well, the dissolution of) the stagnant Soviet command economy.

There are of course many caveats. Some might argue that what the USSR suffered from in inefficiency it made up for in more focus on developing human capital (which is the single most important factor for long-term productivity growth). I don’t see this as convincing. As mentioned above, literacy rates by the 1910′s were above 40%; the school enrollment figures of the mid-1910′s would only be reattained in 1925. It is simply wrong to say that the Tsarist regime neglected human capital, it was just developing it from a lower base and the Soviets merely took over that process.

The two biggest problems were that (1) the Soviet economy was seemingly unable to develop to more than 40% of the US per capita level, due to its inefficiency – that was its ceiling; and what’s worse, (2) it could not be dismantled without incurring a hyper-depression in the meantime. That second point is the reason why many Russian leftists continue to insist that the Soviet economy was a good thing, at least it held steady relative to the Americans under Brezhnev as opposed to collapsing in the 1990′s (which is in actuality the collapse of the Soviet economy), and being on the retreat throughout late Tsarism (for aforementioned structural reasons, but whose negative influence was weakened from the 1900′s); they also for some reason think that a GDP per capita at 40% of the US level is something to be proud of.

Addendum 6/22: I noticed Sergey Zhuravlev makes much the same arguments in his article Wily Lines

(Republished from Da Russophile by permission of author or representative)
 
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Via The Economist, I’ve come across some fascinating research by Orley Ashenfelter and Stepan Jurajda (Comparing Real Wage Rates, 2012) showing how real wages can be meaningfully compared across different regions by taking notes on prices and wages in McDonald’s restaurants.

The methodology seems solid. Big Macs are a very standardized product, hence they are already used in the so-called Big Mac Index to assess international price differences (and whether currencies are undervalued or overvalued) and REAL wage rates (prices tend to be lower in poorer countries, mitigating the effects of lower nominal wages). By combining these two measures, you can derive the quantity of Big Mac a McDonald’s worker can buy through one hour of his labor (BMPH). This in turn is a good proxy for real median wages, i.e. the life of the average Joe and Ivan in comparative perspective. While we might not want to people to buy too many Big Macs it’s a positive thing if they can actually afford to.

The results for Russia are stunning, and no doubt go a very long way why Putin has retained 70% approval ratings since 2000. Russia’s BMPH increased by 152% (!) from 2000 to 2007, and a further 43% through to 2011, leaving all other economic regions in the dust, even despite a sharp recession in the latter period. The only major region with a comparable performance is China. In contrast, the BMPH has stagnated throughout the developed world since 2000; and Not So Shining India joined them from 2007.

During the boom years of 2000-2007, real wages for lower-class workers appear to have risen sharply in Russia, China, and India; while stagnating or declining in Japan, the US, and Canada.

Furthermore, the MBPH continued rising sharply in Russia throughout 2007-2011, despite a very deep recession; and to a lesser extent, in China and the rest of Eastern Europe. Two of the BRICS, India and South Africa, had very deep declines.

The result of this growth is that even by 2007, the Russian BMPH was already at about 50% of West European and American levels; while its wages were still much lower, this was mitigated by concurrently low prices for its Big Macs.

Another noticeable thing is that the effects of higher West European minimum wages disappear as they are mitigated by higher Big Mac prices relative to the US. As a result real wage rates across the developed world seem to be remarkably similar, with Japan’s somewhat higher. But Japan too would converge by 2011.

BMPH 2000 BMPH 2007 BMPH 2011
U.S. 2.59 2.41 2.19
Canada 2.41 2.19 2.06
Russia 0.47 1.19 1.70
South Africa 0.81 0.56
China 0.36 0.57 0.71
India 0.23 0.35 0.30
Japan 3.03 3.09 2.22
The rest of Asia 0.53 0.50
Eastern Europe 0.8 0.86
Western Europe 2.23 2.12
Middle East 0.39 0.39
Latin America 0.35 0.36

Using data on BMPH growth rates from the original publication, I calculated the BMPH for 2000 and 2011 in addition to 2007 to get the figures above.

This shows the BMPH for 2000, 2007, and 2011 for each major economic region. What’s remarkable is that even in many of the countries lauded as “emerging markets” there was hardly any visible progress, and in a few cases, outright decline.

But what’s most fascinating is how Russia, whose economy has never received much in the way of praise, has emerged from Latin American-like destitution in 2000 to perch fairly close to the BMPH of the US, Canada, Japan, and Western Europe by 2011. If that is not an “economic miracle” then I don’t know what is.

This convergence is reflected in many other aspects such as Internet penetration (now equal to Greece and Portugal), new car sales (Czech Republic), GDP in PPP terms (Poland). Furthermore, as the MBPH directly reflects the earnings of lower income workers, it implicitly accounts for the relatively high – but by no means exceptional – levels of inequality in Russian incomes.

That said, the finding that Russian real incomes (as per the BMPH) are now at about 80% of American and West European levels has to be treated with some caution. After all, the Big Mac is domestically produced, but to buy stuff like quality cars or take foreign holidays you have to pay international prices which are far higher than Russian domestic prices. E.g. only 8% of Russians will vacation abroad in 2012 (5% if you just include the ex-USSR Far Abroad), compared to 20% of Americans.

As shown in the graph above, originally compiled by Sergey Zhuravlev, Russian consumption of food products, meat, fish, milk, and fruit is now essentially equal to US and West European levels. (Consumption of tobacco and alcohol is unfortunately significantly higher). But spending on clothing, housing, furniture, healthcare, transport, holidays, and restaurants is below 50% of US levels, even after accounting for price differences. (The situation vis-a-vis Western Europe is slightly better).

On the one hand, this means that whereas Russians now have full bellies, the country still lags on life’s perks and luxuries – most especially on restaurants and holidays. On the other hand, it may well presage strong growth in the years to come as Russia during the past decade has laid the base for a rich consumer society.

(Republished from Da Russophile by permission of author or representative)
 
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Despite the generally loathsome nature of The Economist, it does have its advantages most of which can be reduced to its Daily Charts blog which focuses on statistics as opposed to rhetoric.

According to the chart above, as of 2012 ever more people, especially in the developed world, are starting to believe that the China is the world’s leading economic power. In terms of nominal GDP, and even conventional measures of GDP (PPP), the Krauts are wrong at least for now. However, as per the chart below, China is fast overtaking the US on increasing numbers of metrics by physical volume – steel (1999), CO2 emissions (2006), exports (2007), and manufacturing output, energy consumption, and car sales (2010). Indeed, according to Arvind Subramanian, in PPP terms China already overtook the US back in 2010, and I think this is plausible given that it ties in perfectly with China overtaking the US in so many key categories in that year. Regardless, by 2015 it will become increasingly hard to deny that China has the bigger economy in PPP terms, and soon after in nominal terms too as the yuan massively appreciates against an increasingly devalued dollar.

(Republished from AKarlin.com by permission of author or representative)
 
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According to a recent Levada poll, more Russians are starting to go to fun places on vacation. The total numbers of those going to the Black Sea or the Far Abroad rises to 16% in 2012, compared with 9% in 2006, 5% in 2000, and 4% in 1997. The percentage of those saying they won’t vacation at all has halved from 31% in 1997 to 15% today. The biggest increase, albeit from a very low base, has been in the percentage of those saying they will go to the Far Abroad, which rose to 5%; the total for all foreign countries, including in the Near Abroad and Crimea, is 8%. This is still significantly below developed country levels like the US (20%) or the UK (34%) but again in this, as in cars, Internet penetration, and GDP per capita, convergence is undeniable.

1997 2000 2003 2006 2007 2008 2009 2010 2011 2012
Dacha 23 25 27 22 21 22 24 25 24 24
Black Sea (Russia) 3 4 4 6 7 7 6 7 7 9
Crimea - - 1 2 1 1 2 2 2 2
Baltics <1 <1 <1 <1 1 1 <1 1 2 1
Other Russian place 7 5 5 6 6 5 5 4 5 6
Other ex-USSR place 1 2 1 3 1 2 2 3 2 1
Far Abroad 1 1 1 1 2 2 2 3 3 5
Remain at home 33 45 40 34 34 33 31 29 28 30
Won’t go on vacation 31 23 17 17 20 22 20 16 18 15
Not yet decided 10 6 8 11 11 15 13 18 14 15
(Republished from Da Russophile by permission of author or representative)
 
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Just in case you thought the correlation between human capital and economic development was an artifice of the post-socialist world, here is a similar graph (R2=0.4273) for all the world’s countries that have participated in the Math and Science portions of the PISA or TIMMS (8th grade) international standardized student assessments.

education-economy-global-1

The methodology is the same as described in the previous post. As you can see, the relation is every bit as strong at the global level. However, you may point to a few outliers. How to explain them?

Corruption, institutions and “governance”, “ease of business” indicators, etc. are all next to useless; in fact, it has even been found that some corruption is better for growth than no corrupt at all (though there is a critical point of extreme corruption at which it becomes deeply harmful).

But these are minor technical discussions. As far as I can see, there are only three major factors that explain why some countries diverge from the close correlation (R2=0.8393) between human capital and economic development observed in normal countries with a long history of capitalist development: (1) Major exporters and mineral exporters, relative to their total GDP; (2) Countries with a legacy of socialism and central planning; and (3) Countries with small populations that are also major financial, tax haven, or tourism centers.

education-economy-global-3

As you can see from the graph below, the conventional countries would form a nice best fit exponential curve (R2=0.8393). So would the countries with socialist legacies (R2=0.4908), albeit with greater dispersion and at a systemically lower level than the normal capitalist ones – especially once you remove those among them with substantial resource endowments. The same in reverse applies considering those countries that have managed to occupy niches in tourism, providing tax havens, and above all in financial services (R2=0.6014) – they do systemically better than the normal capitalist countries. The only countries to defy this iron correlation between are those whose oil production enables their populations to live off the rents from it (R2=0.0002); but these Rich Oilmen countries are very few in number, and concentrated in the Gulf.

The Capitalist Normals

The Capitalist Normals (blue) have long histories of capitalist development, and while some – like Australia or Argentina – may have large primary resource endowments, they cannot be said to dominate the economy. They have a very close correlation (at least by social science standards) between levels of human capital and economic development. The developed countries in this band occupy the global technological frontier. As usual, the outliers tend to be exceptions that prove the rule, so I’ll focus on them.

Argentina does slightly better than its PISA scores might otherwise indicate, but here there may be a few explanations: (1) Older Argentinians are far better educated than their counterparts in most of the rest of Latin America; (2) Low school-leaver human capital may be in part compensated by having the continent’s highest tertiary enrollment ratio.

UPDATE: The Argentina outlier is solved. According to Steve Sailer, Argentina’s low score is thanks to the scrupulousness of its school administrators, who – unlike most other countries – took the effort to track down the truants and drop-outs, who constituted 39% of its school-age population. Without this effect, Argentina’s score would have been about 40 points higher, i.e. above Mexico, and similar to Chile and Bulgaria, that is to say right where it should be. Sailer also makes the observation that since truancy tends to be more prevalent in poorer countries – a factor that is only rare adjusted for in the PISA tests – the gap in the human capital of older schoolchildren between the high-scoring developed world and the low-scoring developing world are, if anything, even higher than recorded in these tests.

Syria and Jordan both do a bit worse than their potential. Perhaps the influx of poor Palestinian refugees depresses Jordanian per capita wealth, while Syria is hampered by an extremely statist economy.

Israel is a major positive outlier. One explanation is that there is a lot of math and scientific aptitude diversity within Israel, with Arabs and Sephardi Jews performing badly and Ashkenazi Jews doing much better and perhaps a great deal of variation within the higher-IQ Ashkenazi group in particular; however, this is not borne out in the statistics, with the standard deviation for Israeli scores no higher than in many other countries. So why is it richer than, say, Turkey? No idea. Maybe because of US financial help, which is not inconsiderable. Maybe because the entrepreneurial Jew stereotype is correct even if the clever Jew stereotype isn’t.

Greece is a minor positive outlier, but their debt crisis is cutting it down to where it should be; as with Ireland a few years ago (it used to be an outlier in 2007 but is no longer). I guess the invisible hand has a sense of justice.

The United States is the most significant positive outlier, getting almost $10,000 more GDP than would be warranted by its human capital levels, which are comparable to Sweden or Australia. One major factor is surely that Americans simply work much longer than Europeans; their productivity levels, output per hour worked is, in fact, virtually equal to that of Germans or Swedes. It also helps that it has plentiful land per capita with the world’s best natural riverine transport system – and useful land, not permafrost like in much of Russia or Canada – and controls the world’s reserve currency.

Korea is a major negative outlier, one of the world’s cleverest countries but one that hasn’t yet even fully caught up with Italy. However its case – as is, to a lesser extent, that of Finland and Taiwan – is explainable by the simple fact that for them, “convergence” isn’t a finished process; they continue to grow relatively rapidly by already-developed country standards, they do not have any debt or fiscal crises, and they can expect to continue moving in the direction of ultra-rich countries like Switzerland and Singapore in the next decades. That said, Japan – also a minor negative outlier – indicates there may be diminishing returns to ever more impressively educated populaces.

It is important to emphasize, also, which countries in this category are NOT outliers: Brazil, Mexico (despite a substantial oil endowment), Indonesia, India, and Turkey. Also South Africa, which is not in this database, but can be inferred to have very low human capital based on its still prevalent illiteracy and very low TIMMS (4th grade) results. Now Brazil and India are regarded in the Davos press as superior to Russia, and in the long-term superior to China also (by virtue, so their argue, of their democracy and “demographic dividends”); the other nations cited here have all at one time or another been suggested as replacements for Russia in the BRIC’s.

If we are however to regard human capital as the main determinant of the natural level of economic development, and the “potential gap” between the two to be the most reliable determinant of future growth prospects, then the best BRIC by far is China, followed by Russia; to the contrary, India and Brazil (and any prospective BRIC’s members) are unremarkable.

The Red Tigers

The Red Tigers (green) are countries with major legacies of socialism and often central planning. It is interesting to observe that countries where reforms started earlier (e.g. ex-Yugoslavia, East Central Europe) and where markets played a greater role under socialism are much closer to the “equilibrium level” indicated by their levels of human capital. That said, despite their relative affluence, their “potential gaps” are still substantial; for instance, the Czech Republic and Poland have human capital basically equivalent to that of Germany or the US, but are still up to twice as poor in terms of GDP (PPP) per capita. This implies that this group will continue converging to advanced developed countries in the years ahead.

Practically all outliers in this group are negative, and were already covered in the previous post. But to recap:

China is the mother of all outliers, and no doubt a very significant one – it has 1.3 billion people living at lower middle income levels (although a few provinces remain distinctly Third World) but their high-school students now outperform the US and most of the EU. In my opinion this is the result of a very special situation.

The Maoist state suppressed economic growth to a degree unprecedented in virtually any other state in the socialist camp; it also started from a very, very low base. But despite its ruinous economic views, its social policies – including basic education – were implemented far better than in almost any other low income country, and that on top of (a) their reverence for scholarship that only had its equivalent in the Protestant emphasis on literacy and (b) the observed high IQ of Chinese overseas communities which may have a genetic component. This means that when China introduced market reforms, the “potential gap” between its human capital and existing level of economic development was vast to a degree probably unprecedented anywhere else in the world and in all history. Hence thirty years’ worth of 10% GDP growth that shows no sign of stopping (in fact, China’s relative performance exceeds that of any other Asian tiger in their stage of rapid development). And barring a major and unexpected discontinuity is should NOT stop until China reaches the level of per capita wealth Korea, Taiwan, or even Switzerland.

One minor caveat is that rapid development means that this “potential gap”, while vast, may no longer be quite as vast as indicated by the graph. Note that according to some estimates, China’s PPP GDP is now larger than America’s, which would give a GDP (PPP) per capita of $10,000-$12,000 or so.

Armenia, and to a lesser extent Serbia and Bosnia-Herzegovina, are negative outliers. Their cases are clear; they suffered from destructive wars in the 1990′s, and in Armenia’s case it remains surrounded by neighbors from hell.

The ex-Soviet countries without oil, such as Ukraine and Moldova, tend to be deeply negative outliers. One reason is that they reformed slowly (while the Soviet-era system crumbled about them), and late; and have suffered from particularly incompetent and avaricious governance; as I argued in a prior post, Ukraine never left the period of “anarchic stasis” that characterized Russia in the 1990′s. However, Ukraine’s perspectives aren’t looking good, at least in the short-term. Perhaps it’s because corruption, etc. are still so high that – while they normally don’t have much of an effect – reach such critical levels that they significantly stymie growth; an alternate, and more benign, explanation is that Ukraine’s GDP (PPP) is underestimated – it was not adjusted upwards like Russia’s in the recent OECD and World Bank recalculation of relative prices – meaning that Ukrainians already live better than the statistics indicate, their “potential gap” is smaller, and thus understandably there is less room for fast GDP growth.

Azerbaijan, Kazakhstan, and Russia are curious creatures in that in their case, the resource windfall boon works against the socialist legacy curse. This means that, despite that they are ex-Soviet – i.e., the economy was more deeply distorted and reforms started later than in much of the rest of the socialist camp – they are nonetheless on the upper part of the human capital and economic development curve, along with countries like the Czech Republic or Romania, and are not outliers like Ukraine or even Latvia.

At this point I would also like to demolish the myth of Georgia as a shining beacon of unimpeded economic progress in the Caucasus. It will not transform into Switzerland or Singapore, or even Estonia, any time soon, i.e. the next few decades. Its human capital is very low and it is already fairly close to the maximum economic potential enabled by it; this may be an achievement on Saakashvili’s part, who massively – one might say recklessly – liberalized the Georgian economy, which caused (or accompanied) a big growth spurt in the mid to late 2000′s. But it is unsustainable, first because Georgia is now far nearer the limits imposed by its low level of human capital; second, because if anything human capital has declined under Saakashvili (e.g. tertiary enrollment has nearly halved as university fees exploded, making post-school study much less affordable for ordinary Georgians).

The Oilmen

The Oilmen (red) are those very lucky countries with lots of oil and small populations. It is almost always oil; the sole exception in my sample is Botswana (diamonds and minerals).

Unlike either the Capitalist Normals or the Red Tigers, there is no correlation between levels of human capital and economic development among the Oil Guzzlers. That is because the oil production per capita effect, which relies on geological luck of the draw, overpowers all others. That said, they could be divided into a few distinct groupings.

(1) The Rich Oilmen. Qatar, Kuwait, and the UAE, and to a lesser extent Saudi Arabia, Bahrain, and Oman, are all fabulously rich thanks almost exclusively to their resource endowments. Their human capital is unimpressive and would not otherwise come anywhere near supporting their oil-enabled luxurious lifestyles. Their attempts at diversification are to be lauded, e.g. finance and tourism in Dubai, or journalism in Qatar, but these efforts are critically reliant on attracting foreign specialists with (oil) money so they are not sustainable.

(2) The Casual Oilmen. Norway and Russia benefit greatly from their oil windfalls; for a start, they largely rule out fiscal worries. Benefiting from uninterrupted capitalist development, Norway has transformed itself into one of the world’s wealthiest nations; even if it didn’t have oil, it would still be as rich as Sweden. Russia will probably never reach Norway’s level because the latter has far more oil per capita; nonetheless, it has a decent manufacturing base (e.g. capable of making stuff like GLONASS and advanced fighters) and a moderately growing economy that has no reason not to converge to Italy by 2020 and perhaps Sweden by 2025 or 2030. Tight supply and growing demand means that it is very unlikely that oil prices will fall and remain low in the foreseeable future, but even on the off chance that they do, Sergey Zhuravlev has calculated that the effects on Russia’s economy are going to be modest in the medium-term and negligible in the long-term.

(3) The Poor Oilmen. Oil is likewise of help for plugging budget holes to Algeria, Kazakhstan, Iran, Venezuela, Mexico, and Azerbaijan. However, unlike the case for the Rich Oilmen, their populations are too numerous to live off in sumptuous comfort off the rents; oil production per capita is too low. This means they can’t fly off into the stratosphere like the Rich Oilmen. They need non-oil based growth to become rich. But unlike the Casual Oilmen they are unlikely to achieve much of that because their human capital levels are very modest. If there is an oil crash, past experience – e.g., Venezuela in the 1980′s and 1990′s – suggests that they will be in for many years of stagnation and fiscal crises.

The Bankster Nations

The Bankster Nations (crosses) tend to be small countries which have managed to become major financial, tax haven, or tourism centers. Their GDP (PPP) per capita tends to be higher than the level suggested by their human capital, but not to anywhere near the same extent as the Rich Oilmen.

Liechtenstein is the biggest outlier in my database; its human capital is respectable, but its GDP (PPP) per capita at $141,000 is literally off the chart. No wonder when their population is a mere 30,000 souls. Luxembourg, Singapore, and Hong Kong have all carved themselves out very profitable niches as financial centers serving neighboring economies that are much bigger but also more regulated. Macao is Asia’s gambling center (and unofficial a conduit for Chinese money laundering). Cyprus serves a similar money laundering and reinvestment function for Russian nouveux riches, to the extent that the Russian government recently bailed out the island. Mauritius is a tax haven, and is also – along with Malta and Trinidad & Tobago – a popular vacation spot.

Switzerland is an entire nation that has devoted itself to financial services (including the more shady, secretive ones) as well as other very high added-value stuff like precision engineering and pharmaceuticals. And it has become extremely rich.

Without exception all these places are doing better or far better than the average Capitalist Normal country. That said, even here there is a definite correlation between human capital and GDP (PPP) per capita. These activities may require less hard work and scruples than is typical for other industries but they still require brains – especially for the high-end finance stuff. Not so surprising then that it is the highest human capital countries like Singapore, Hong Kong, and Switzerland that have become so prominent in it.

(Republished from Sublime Oblivion by permission of author or representative)
 
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That title sure caught you attention? Good. Now for the 1000-words-in-a-picture evidence.

gdp-human-capital-socialist-bloc-3

Human capital refers to educational attainment, as measured by the results of the PISA and TIMMS standardized tests*. As you can see, there is a very close correlation between human capital and GDP (PPP) per capita. The exceptions all confirm the rule. For now I have only done the post-socialist space, because of its sheer variety – different cultures, different rule-of-law and ease of business environments, difference resource endowments and political systems – which lets me illustrate just how irrelevant all those factors are compared to human capital. The same laws hold at the global level, and I intend to cover it in a consequent post, but that involves a lot more work so for now I’ll just settle for this.

The Near Developed nations have respectable GDP per capita (approaching the poorer members of the classical developed world, such as Portugal and Greece), and levels of human capital that are basically equivalent to those of the rich countries. They are close to converging with the developed world, so growth tends to be relatively slow by the standards of more dynamic (but much poorer) emerging markets, on the order of 3%-5%. Despite their low positions, neither Russia nor Latvia are outliers; more recent calculations by the World Bank give Russia a PPP GDP of $20,000 for 2010, wedging it in with Hungary, Poland, and Lithuania; while Latvia was very severely affected by the late recession. The Czech Republic is close to being a positive outlier: One reason may be its proximity to developed Germany, another the early start of its reforms.

The Red Train is, basically, China. Its searing growth rates aren’t because of its state capitalist system or the Confucian work ethic, but because its human capital is wildly out of line with its economic development. Its high school graduates are ready to operate complex machines and staff the most hi-tech enterprises, but the legacy of Maoist economics – which, hard as it is to believe, were even more inefficient and offered fewer incentives than under Soviet central planning – means that a significant share of the population still uses oxen-pulled plowshares for farming. So it is no wonder that, with its markets freed, the system is straining to catch up – at the pace of 10% per year – to its equilibrium place along with South Korea and Japan. Note also that according to some estimates, China’s PPP GDP is now larger than America’s, which would give a per capita level of $10,000 or so; significantly higher than the figure displayed on the graph.

The Slow Middle are countries with moderate levels of human capital, and they are significantly poorer than the Near Developed nations; for them, convergence to developed country levels is still far away. Their growth rates are modest because their economic development is only slightly, if at all, below the level natural for their degree of human capital. While Turkey and the Balkan countries don’t look that far away from the poorest Near Developed countries, it should be noted that all three are currently suffering from major disbalances that could well end up in Latvian-style crashes. To set themselves on a sustainable development path, they will have to raise their human capital levels by at least another notch. The two negative outliers are Ukraine and Armenia. Ukraine has just been horrendously mismanaged; as I argued in a prior post, it never left the period of “anarchic stasis” that characterized Russia in the 1990′s. That said, the Ukraine may not so much of an outlier; its prices are low, and salaries are comparable to Serbia’s, so its PPP GDP may well be substantially underestimated. Armenia is an even more glaring outlier, with human capital that is comparable to the weaker Near Developed members, but I suppose huge military spending and being blockaded on two sides, and bordering Georgia and Iran on the other two, isn’t conductive to prosperity.

The Doldrums consist of Georgia and Moldova. Georgia has had good management under Saakashvili (it is now far less corrupt than Russia, or its Caucasian neighbors, and Ease of Business is very good by global standards), and Moldova has had bad management; nonetheless, their differences in GDP per capita are modest. The problem is that their schools produce people who are, largely speaking, functionally innumerate; so no matter how hard Saakashvili wills it, Georgia isn’t becoming a Singapore of the Black Sea any time soon. Sustained convergence to developed country levels is out of sight; radical improvements in human capital will first have to be made, and they can’t happen in the space of a few years; they require decades. The Saved By Oil group include Kazakhstan and Azerbaijan. They are as wealthy as the Slow Middle, but as stupid as the Doldrums. But in a world of high oil prices they should be relatively well off.

Kyrgyzstan is in the Third World. Although its Soviet-era legacy has enabled it to provide universal primary schooling, the quality of the products of that schooling is comparable to India – at the very bottom of the global heap. It may achieve decent growth of perhaps 4% or 5%, but it will be from a very low base.

There are several conclusions to this. First, there are only really three important factors to economic development. First, above all, human capital, i.e. primarily, the quality of education. It makes sense on an intuitive level and there’s a ton of literature in support but the graph above makes it… graphically clear. Second, resource endowments, when highly concentrated per unit of non-resource extraction based GDP – as in Kazakhstan and Azerbaijan, but not quite in Russia – will hugely, and positively, influence the level of GDP (it does play a substantial positive role in Russia but it should be noted that Russia’s oil production per capita is less than Canada’s, and its oil production per unit of GDP is far less than Kazakhstan’s or Azerbaijan’s). Third, political management. Especially incompetent regimes such as the ones in Ukraine will hold it back from achieving the full potential enabled by its human capital; if its monstrously incompetent and repressive of growth, as in Maoist China, the resulting gap between reality and potential can develop to truly vast proportions; consequently, when the most egregious barriers are removed, as during the late 1970′s, growth takes off at truly prodigal rates.

Equally important is the fact that things commonly cited by Thomas Friedman, Davos Man, The Economist, The WSJ, The Financial Times, the respectable experts, etc. etc. as important for economic growth turn out to be largely irrelevant. Ukraine is more democratic than Russia and Kyrgyzstan is more democratic than China, but their growth profiles are much worse regardless. Russia is fairly corrupt – though not nearly to the extent implied by Transparency International’s Corruption Perceptions Index – and so is Hungary, and they both have much poorer Ease of Business indicators, but they are both much better off than cleaner and business-friendly Georgia. Latvia was part of the “clean” Baltics, but that didn’t stop it from tumbling to the bottom of the Near Developed pack in the wake of the global financial crash; is it too much of a coincidence that Estonia, which has a slightly edge in human capital, managed to hang in tight? The three biggest outliers by far in a best fit line on the graph – China, Kazakhstan, and Azerbaijan – are all patently explainable by a Maoist legacy and oil windfalls.

Suffice to say, most of the former socialist bloc – most of the world, in fact, but that’s for another post – is at precisely the economic development levels implied by their levels of human capital. There are exceptions, most especially China, but to a lesser extent also many of the poorer Near Developed countries, where the distortive legacy of central planning has resulted in lower current economic development levels than should otherwise have been the case had markets been allowed to function; nonetheless, they tend to compensate with respectable growth rates, as the reality – potential gap seeks closure. If you need to blame someone for why your country is poor, don’t bother trotting out the usual canards: State interference, authoritarianism, corruption, anti-Western policies, privatization and liberalization will solve everything! (liberal canards); neocolonialist exploitation (leftist canards); Russian exploitation (East European nationalist canards). More likely than not your countrymen are illiterate, innumerate slobbering buffoons and it’s as simple as that.

* Human capital was calculated by the average of PISA 2000 scores in Math and Science, and of TIMMS 2008 scores in Math and Science. Where data sets for both assessments existed for a particular country, the TIMMS score was – on average – around 7.7% higher than the PISA score, so I adjusted the former down by that amount. The human capital index was calculated by taking the average of the PISA and adjusted TIMMS scores where applicable, or either the PISA score or the adjusted TIMMS score where data for only one of them existed.

(Republished from Sublime Oblivion by permission of author or representative)
 
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Anatoly Karlin
About Anatoly Karlin

I am a blogger, thinker, and businessman in the SF Bay Area. I’m originally from Russia, spent many years in Britain, and studied at U.C. Berkeley.

One of my tenets is that ideologies tend to suck. As such, I hesitate about attaching labels to myself. That said, if it’s really necessary, I suppose “liberal-conservative neoreactionary” would be close enough.

Though I consider myself part of the Orthodox Church, my philosophy and spiritual views are more influenced by digital physics, Gnosticism, and Russian cosmism than anything specifically Judeo-Christian.