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The TIMSS 2015 results for math and science are out and the results are pretty predictable.

All the data can be conveniently downloaded from here: http://timss2015.org/download-center/. See also Steve Sailer’s post from yesterday.

Math (8th grade)

timss-2015-math

Science (8th grade)

timss-2015-science

An extension of Heiner Rindermann’s observation on the differences between the two major international standardized tests – namely, that PISA is more a test of general intelligence, while TIMSS loads more heavily on specific curricular knowledge (Rindermann 2015) – is that the difference between the two can be used as a rough proxy for the quality of school systems.

After all, raising general intelligence through special schooling methods is well nigh impossible, but it is possible to teach how to do fractions properly. As I pointed out back in 2013:

However, a second possibility is that the PISA-TIMSS/PIRLS gap is a proxy for differences in the quality of educational systems. It is more feasible to prepare for the TIMSS/PIRLS than it is for PISA, which is closer to an IQ test and is, as such, more difficult to improve through policy interventions. It is nowadays fashionable to lambast the ex-Soviet and East Asian school systems for “rote learning,” “stifling creativity,” and whatnot. However, the data shows that under these systems, pupils perform well above the levels they “should” as indicated by their underlying IQ levels. Meanwhile, in places where “creativity” and “self-expression” are given full bloom, where science lessons focus on the evils of plastic bags in between sermons on LGBT appreciation and the progressiveness of Islamic civilization, academic performance is somewhat less than what might expect based on the local students’ apparent IQ levels.

The ex-USSR countries do not have particularly high IQs by developed European country standards – Russia itself is at around 97 – but it is nonetheless the best performing non-East Asian country in the TIMSS math test, and second after Slovenia in science. Kazakhstan comes just after Russia in math, which is highly impressive given that ethnic Kazakhs have an average IQ of just 82 relative a British mean of 100 (Grigoriev & Lynn 2014).

The Scandis are the opposite in this respect – pretty respectable native general intelligence, but much poorer than expected scholastic results. In the last TIMSS, only around 15% (sic!) of Swedish and Finnish 8th graders were able to do basic fractions. Normally I would have a hard time believing this, but the source was impeccable, and the horror stories about Swedish schools I’ve heard from Swedish acquaintances makes me willing to give credence to such results.

The East Asians get the best of both worlds, and for all the criticism directed at the education system in both the US and England – especially the marked Finland worship you get after every round of PISA – they do pretty solidly as well.

As per usual, the results from Africa and the Arabs are hopeless. As an an Arab Gulf State bigwig once said, “My grandfather rode a Camel, my father rode a Camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a Camel.”

 
• Category: Race/Ethnicity • Tags: Education, Intelligence, TIMSS 
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Recent news of the Japanese government directing its public universities to stop offering social sciences and humanities courses raises some pretty important questions over the future of higher education in the age of fiscal deficits, automation, and e-learning ahead.

An entirely predictable debate followed, with skeptical conservatives (and I daresay most Unz readers) saying good riddance, and liberals screeching about how humanities are just as important as STEM for maintaining functional, civilized societies. Both make some good points but the largest issues, as always, seem to be systemically sidelined: Psychometrics, and to a lesser extent, the new possibilities opened up by technology.

(1) Here is the famous graphic produced by Linda Gottfredson. Probably only about 25% of the population can truly benefit from a university education, STEM or otherwise. All conversations must start from here.

education-and-iq

(2) For the lower IQ segments who like sciency stuff, “hands on” or apprenticeships are best. Germany has a very well developed system in this respect, with the result that a very large percentage of its workforce (relative to other First World countries) continues to find gainful employment in its manufacturing industries.

(3) I do think that Humanities and Social Sciences subjects can be quite useful, not least to inform and deepen work in STEM subjects themselves (e.g. gene-culture evolution)! And specialists in Economics, Linguistics, and various foreign cultures, etc. are very important for any state. But to achieve true competence in any of these areas you really need first rate human capital. There are greatly diminishing returns to funding proper university study of any of these subjects on as far as <115 IQ people are concerned.

But the benefits of studying any of these subjects extend beyond the merely functional, economic sense. A society in which even a plumber could venture some cogent thoughts on the collapse of the Roman Empire or the relative merits of Hobbes vs. Locke is a better and more cultured society and that has value of its own. Today there are plenty of online learning resources (e.g. Coursera, Udemy, etc) that they could be encouraged to take advantage of and even subsidized to do because ultimately they are only a tiny fraction of the cost of conventional university educations and will have little effect on the budget.

(4) Then there are the “fluff” subjects, like Anthropology, Sociology, African-American Studies, Women’s Studies, etc. Generally speaking, they are hopelessly politicized and produce negative value added, an unholy mixture of Marxist and postmodernist dreck. Some can and must be salvaged, while only the most overtly unscientific and grievance-based should be abolished entirely (e.g. African-American Studies, Women’s Studies). This “purging” process could be organized in the elite universities, and then once cleaned up should be left free to roll back into the middling universities alongside the H&SS group.

(5) Here is a summary:

Current Situation STEM H&SS Fluff
Elite Universities (IQ >120) Y Y Y
Middling Universities (IQ 105-120) Y Y X
Polytechs/Community Colleges (IQ 90-105) Apprenticeships Online X
No tertiary education (IQ <90) “Hands On” Online X

(6) There is a lot of specifically American angst over subsidized or free university funding, which is standard in Europe.

But it actually makes a lot of sense from both progressive and “reactionary” perspectives.

From the progressive perspective, having more human capital and more culture is good. There will be more of it if higher education is subsidized.

From the “reactionary” perspective, you want higher IQ people starting families at earlier ages and having more children. This is difficult to do if you’re saddled with student debts. Subsidizing university education will remove that problem.

Of course, subsidized education can be quite expensive. (Though nowhere near as expensive as modern healthcare or even pointless wars in the Middle East). But remember that I am suggesting limiting university educations to the top 25% of the population or so. The “STEM-orientated” people who are below that threshold will generally be better served by getting apprenticeships or hands on training (cheaper), while “H&SS-orientated” people now have the option of satiating their curiosity through online learning (MUCH cheaper). Ultimately I am not a ruthless conservative, I believe society should fund people to achieve their full potential. It’s just that this funding isn’t very well distributed now.

It is my impression that universities are becoming fossils in general, being made obsolete by technological advances and only clinging on because getting a paper degree still remains social convention. To be very frank, I am not even sure that the sort of things being taught in most undergraduate courses still needs to be done at brick and mortar establishments. Most humanities and social science courses consist of lectures for crying out loud. Just get some charismatic professor – he doesn’t even have to be the best in his field – to produce lectures with the requisite materials and post is on the Internet (for some people who prefer textual to in-person learning this reliance on lectures is actually harmful). The only thing that actually needs to be funded fully is exam-taking for certification purposes.

But barring truly radical changes, I think the previous suggestions would still be of general social benefit.

 
• Category: Economics • Tags: Education, Japan, Universities 
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I had been meaning to post about this for a long time. Better late than never, I suppose.

The TIMSS and PIRLS are international assessments of academic ability in math, science and literacy that are conducted once every four years. They are similar to the PISA tests, although the latter are less purely academically focused and more a test of pure IQ.

Here are the results of TIMSS/PIRLS (h/t North Asian). And here are the results of PISA from 2009 for comparison.

As can be expected, they are highly correlated (r > 0.8 to be precise). This however makes the few differences all the more interesting. The gap between the East Asian countries and European countries, though substantial in PISA, is significantly greater in TIMSS/PIRLS. And most strikingly, both Russia and Israel go from being laggards in the OECD group to being at the forefront of the class.

Math (PISA) Math (TIMSS)
Korea 539 613
Sweden 494 484
Russia 468 539
Israel 447 516

From performing more poorly than Turkey in the PISA reading test, Russia soars to take second global position in the PIRLS.

Reading (PISA) Reading (PIRLS)
HK 533 571
Sweden 497 542
Russia 459 568
Israel 474 541

Meanwhile, some European countries, especially Sweden and Norway, plummet quite substantially.

What explains all this?

There are two possibilities. First, the TIMSS/PIRLS tests may have poorer samples than the PISA. For instance, we know from the latter that Moscow has a 10-point IQ lead over the rest of the country. If Muscovite pupils are over-sampled, then it’s quite feasible for the consequent result to be closer to say Hong Kong or Korea than to Greece or Turkey.

However, a second possibility is that the PISA-TIMSS/PIRLS gap is a proxy for differences in the quality of educational systems. It is more feasible to prepare for the TIMSS/PIRLS than it is for PISA, which is closer to an IQ test and is, as such, more difficult to improve through policy interventions. It is nowadays fashionable to lambast the ex-Soviet and East Asian school systems for “rote learning,” “stifling creativity,” and whatnot. However, the data shows that under these systems, pupils perform well above the levels they “should” as indicated by their underlying IQ levels. Meanwhile, in places where “creativity” and “self-expression” are given full bloom, where science lessons focus on the evils of plastic bags in between sermons on LGBT appreciation and the progressiveness of Islamic civilization, academic performance is somewhat less than what might expect based on the local students’ apparent IQ levels.

This all makes sense, I suppose. To be truly “creative” you first have to acquire a ton of skills and knowledge via the old method of applied hard work. Without that, “creativity” simply boils down to a sea of PoMo-waffling curmudgeons and MacBook-toting hipsters. And whoever needs that?

(Republished from AKarlin.com by permission of author or representative)
 
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Izvestia writes:

The Ministry of Education have evaluated the results of the Unified State Exam of 2013 and identified the regions with the highest numbers of graduates who got the full 100 points on the Unified State Exam. Contrary to popular prejudices, the recordholders aren’t the Caucasian republics, but Bryansk oblast, Kalmykia, and Chuvashia.

I wrote half a year ago (highlights are recent):

As we can see above, the most suspicious results are mostly from ethnic Russian oblasts such as Stavropol, Kaluga, Rostov, Perm, and Vladimir, with the two big exceptions being Mari El and Chuvashia… In so doing, yet another major region of likely fraud crops up: Bryansk. This oblast, along with Vladimir, produces as many top USE results as a percentage of its 18 year old population as does the intellectual capital, Moscow. Kalmykia, Kirov, and Lipetsk also join the list of Russian regions with suspiciously good USE results…

Not to mention:

To the contrary, Dagestan – the biggest Caucasian Muslim republic – has very few top scores relative to the number of very bright people we can expect to find there relative to most other Russian regions

Hard to argue with statistics. Also why you should continue reading Da Russophile.

(Republished from Da Russophile by permission of author or representative)
 
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Russia is to spend 1.5 billion rubles building “Centers of Tolerance” to improve inter-ethnic relations in the next few years. Is this a good use of resources? Pyotr Kozlov examines the issue.

The Ministry of Regional Development to Build Centers of Tolerance for 1.5 Billion Rubles

The Ministry of Regional Development plans to start constructing Centers of Tolerance all across Russia from 2014, where anyone can go to learn more about the culture and traditions of Russia’s peoples. These learning centers will appear in 11 regions of the country: Saint-Petersburg, Omsk, Tomsk, Novosibirsk, Khabarovsk, Yekaterinburg, Rostov-on-Don, Samara, Nizhny Novgorod, Irkutsk, and Birobidzhan. According to preliminary calculations, as we were told by the Ministry’s head Igor Slyunyayev, the problem will require about 1.5 billion rubles in financing, with the first centers slated to open by the beginning of 2015.

According to the Slyunyayev, all the sites will be built to one standard design. “The main task is to revive the traditions of mutual respect and peaceful coexistence that have always characterized Russia,” he clarified.

“These Centers will help promote dialog, discuss hard issues, and tell people about how Russians live in Dagestan, Jews in the Far East, or Ukrainians in Tatarstan. We need to talk more about religion, culture, traditions, and to once again return to the roots of things – that we are one people, who have always lived as one family,” the Minister says.

The work of these Centers isn’t only connected with teaching people how to have tolerant relations with other religious confessions. It is about tolerance in the widest sense of the word, clarifies the head of the Federation of Jewish Communities of Russia (FJCR) Alexander Boroda, who is involved in discussing the project concept.

It’s planned that the standard Center will consist of two or three rooms, one of which will contain a screen showing example reels of tolerant and intolerant behavior. Apart from that, there will be venues for discussion and interactive voting on the educational material, continues Boroda. Yet another room will be used for exhibits on the discussed topics.

Thanks to the wide spectrum of possibilities they offer, the Centers of Tolerance may become popular among pupils and students, the head of the FJCR believes. In addition, he considers that their work will be synchronized with Departments of Education in the regions. All the Center’s study materials and other content will be available for downloading from the Web.

“Of course this place has to become fashionable, in the best sense of the word. Above all, though the various exhibits and expositions. At least that’s our hope,” Boroda says.

The Head of the Public Chamber’s Committee for Inter-Ethnic Relations Nikolai Svanidze is happy about the Ministry of Regional Development’s initiative, but cautions that it’s still too early to judge the effectiveness of the Centers.

“The whole question here is in the content. Money isn’t an issue. Better to invest in Centers of Tolerance, as opposed to stuffing it into officials’ pockets. The main thing we have to avoid is formalism. How effective will this project be? That’s a valid question. But it will only be possible to determine this after the project starts,” Svanidze notes.

The head of the Duma’s Committee for Nationalities, Gadzhimet Safaraliev, also supports the idea, but believes that the project’s name choice could have been better.

“I don’t like the word tolerance. Maybe we can think a bit more on this and choose something like, for instance, Houses of Friendship, Houses of Nationalities? After all, we live in Russia. Is this to say we are, translating into Russian, building Houses of Tolerance? {Translator: A “house of tolerance” (“дом терпимости”) is, lit., a “maison de tolérance”, that is, a brothel} We’re better off learning to be friends, as opposed to tolerating each other,” the deputy remarked sardonically.

The Chairman of the National Anti-Corruption Committee Kirill Kabanov believes that problems of tolerance aren’t going to be solved by building Centers, but by ideological work with people.

“Whenever discussions of construction sites spring up, bureaucrats suddenly get the desire to make it into their personal project. And we know well how things are built here on the government’s account – we have repeatedly seen this in Sochi, and other places. This problem is ideological, therefore the product too has to be ideological,” he says.

The Ministry of Regional Development began developing plans for Centers of Tolerance after October 2012, when Vladimir Putin issued instructions to develop the federal target program “Strengthening the Unity of the Russian Nation and the Ethnocultural Development of the Peoples of Russia,” which is to run from 2014 to 2018.

Prior to this, the issue of inter-ethnic relations in Russia was raised in one of Vladimir Putin’s pre-elections article, in which he referred to the necessity of creating an organization responsible for “questions on national development, inter-ethnic prosperity, the interactions of ethnic groups.” The Presidential Council on Inter-Ethnic Relations was formed in summer 2012, while by the end of the year a concept for inter-ethnic relations had been developed to the year 2020.

Reader comments

Alexandr Kupriyanov: The morons don’t have anything better to do with the money? Only educational tourism in Russia’s republics could help with this issue, such as student exchanges with families, student assignments on the history of certain republics, etc., whereas these Centers are yet another money laundering operation.

Leutnant von Berg: A brilliant raspil/kickback scheme. Better to build true houses of tolerance, in the original meaning of the word {Translator: Maisons de tolérance, aka brothels}: The people will go there, and there will be a high return on investment. But if we are to speak seriously, a person who is interested in another culture will find the time and means to study it by himself, without any Centers.

Алексей Матанцев: Is it so that Russians themselves could discover explanations for why other RF nationalities behave so badly?

Дарья Костычева: Better to call them houses of tolerance from the get go. It makes more sense that way. And of course there’s nothing better to spend 1.5 rubles billion on. There are no problems in Russia at all, apart from russkie!

(Republished from Russian Spectrum by permission of author or representative)
 
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In one of the recent posts on corruption, commentator AP wrote:

Kids from Moscow are having trouble getting into universities now because entrance, based on exam results, skews the chances of acceptance in favor of those students from corrupt regions where they can buy better results. Moscow is less corrupt than, say, Dagestan so Dagestani students perform much better on entrance exams.

Is this true? Seeing as how the Russian state doesn’t release Unified State Exam (USE) results by region, probably due to PC considerations, at first this assertion might appear to be unanswerable. However, there is a way to get round the problem.

(1) We know the PISA-derived IQ’s of some 43 Russian regions (which account for about 75% of its school-age population).

(2) The Russian government DOES release the the numbers of maximum scores in the USE tests by region. In this post we will consider the data for 2012. Furthermore, we know that at least at the federal level, these results tend to form bell curves.

(3) One of the primary “proofs” of electoral fraud in the Russian elections was the presence of spikes at convenient increments of 5%. In the case of USE fraud, we only have access to data for 100% scores and measuring the fatness of that tail should give us a clue as to its relative magnitude. (While it is possible and even likely that school administrators and regions would take care not to create too many maximum marks on the notoriously hard USE tests, far from everybody will follow said precautions. After all, if many regions didn’t even bother to smoothen the spikes to conceal fraud in the elections, is it realistic to posit that they’d take greater care around trifles like exams?).

(4) We know the number of 16 year old’s per Russian region from the 2010 Census, who would have participated in the 2012 exam season.

(5) We know the normal distribution.

The blue bars below show the number of top-scoring exams per region as a multiple of Russian 18 year olds there with an expected IQ of 130 or more, based on the region’s average PISA scores and a standard deviation of 15. The red bars show the same thing, with the major exception that an average IQ of 96 – that is, the national average – is assumed for ALL Russian regions.

unified-state-exam-fraud

As we can see above, the most suspicious results are mostly from ethnic Russian oblasts such as Stavropol, Kaluga, Rostov, Perm, and Vladimir, with the two big exceptions being Mari El and Chuvashia. To the contrary, Dagestan – the biggest Caucasian Muslim republic – has very few top scores relative to the number of very bright people we can expect to find there relative to most other Russian regions.

Finally, the reason that the red bar is a lot higher than the blue bar in Moscow, and to a lesser extent Saint-Petersburg, probably doesn’t have anything to do with foul play, but with the fact that their average IQ’s are about 106.6 and 102.6, respectively (i.e. considerably higher than the national average of 96). So while they generate a relatively disproportionate number of top USE scores, that is presumably because they attract the bulk of Russia’s most intellectual families (the so-called “cognitive clustering” effect).

Of course one problem is that we don’t have PISA data for all Russian regions. Maybe the Chechens do all the cheating then?

Probably not. Chechnya only had a total of five top scored USE results (for comparison, Moscow had 654 top results). In the graph below I produced results for all Russian regions, but with an unavoidable concession: In the case of those regions with no results from PISA, I had to make do with assuming a regional IQ of 96 (as per the Russian national average).

unified-state-exam-fraud-2

In so doing, yet another major region of likely fraud crops up: Bryansk. This oblast, along with Vladimir, produces as many top USE results as a percentage of its 18 year old population as does the intellectual capital, Moscow. Kalmykia, Kirov, and Lipetsk also join the list of Russian regions with suspiciously good USE results (probably not entirely coincidentally, Lipetsk and Kalmykia – along with Ingushetia – were the three regions whose USE results raised suspicions to the extent that they were rechecked).

He also makes the comment:

The schools with the top math students in the country stopped winning Olympiads, while private schools with politically connected kids started to win them…

No obvious way to statistically analyze this, but what we can say with some confidence is that there is no major ethnic angle to this:

share-of-olympiad-scholars-russia

As we can see above, the Central and North-West regions of Russia, which contain the cognitive hotbeds of the two capitals, massively surpass the number of people from the North Caucasus in the share of “Olympians” (basically students who did really well and get benefits) in the annual university cohort.

This is pretty much what we can expect on the basis of the average IQ differentials between these regions.

(Republished from Da Russophile by permission of author or representative)
 
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Here is data from the Cognitive Abilities Test for UK students in 2009/10 via Ambiguous.

Some interesting things to take away here:

(1) The sample is very large. Verbal IQ has the highest correlation with academic performance in most subjects, followed by Quantitative IQ, and then Non-Verbal Reasoning (recognizing patterns and such, I imagine).

(2) Indians do almost as well as Whites, although the structure of their cognitive abilities are a bit different: About 4 points lower than Whites in Verbal, but almost 2 points better in Quantitative. As rec1man said, “The Patels and Sikhs are Upper-Shudra / Vaishya and this is 80% of the diaspora in UK.” So this is highly encouraging for India’s eventual prospects; in indicates that the broad middle can in principle build a reasonably wealthy, middle-class society.

(3) The Pakistanis and Bangladeshis also don’t do too badly – certainly better than I would have expected (I visited a Pakistani school once in the UK and it was horrific).

(4) This might imply we are actually looking at the following average-IQ groups in India: Lower 40% – 93; Middle 40% – 99; Top 20% – 105, for an overall average of 98 (once Flynn Effect is done with them). That’s better than Greece today and certainly good enough to have a developed society. But there’s tons of challenges: Malnutrition, slums, poor education, widespread vegetarianism (both voluntary and involuntary – due to poverty) that have to be sorted out for India to perform to its potential.

(5) As with most IQ tests, the Chinese do as well as Whites in Verbal, but massively better in Quantitative and Non-Verbal Reasoning.

(6) Blacks do surprisingly well, lagging Whites by less than 0.5 S.D., which is VERY encouraging considering that according to US data where they are almost always 0.8-1 S.D. behind Whites. Two issues to consider (and bear in mind) here:

  • To what extent are Caribbean Blacks admixed with Whites?
  • As regards African Blacks, they simultaneously benefit from the Flynn Effect (much better fed than parents) but also suffer from regression to the mean (African immigrants to the US are the most credentialed immigrant group and thus have IQ’s well above the African norm, and I assume to a certain extent this is the case in the UK also; logically, their children who take the CAT will have have lower genetic IQ’s). Which of these forces is stronger?

(7) Another curiosity is that British Blacks do better on Quantitative than on Verbal. In the US it the other way round.

(8) As is typically the case, boys do slightly better on Quantitative and girls do slightly better on Verbal; and girls have lower S.D.’s (i.e. have fewer morons and geniuses).

(9) Incidentally, as a matter of curiosity, I note that in this – what I take to be a fairly representative sample of Britain’s school-age population – the proportion of British Whites is 82%, and the share of overall Whites is slightly less than 85%; mixed people are about 3%. For comparison, British Whites constituted 86% of the population (in 2001), while only 64% of children born in 2005 where recorded as British Whites. Seems like a very fast rate of population replacement.

The other stats were all pretty much as I expected, except for one very, very big surprise – average rural scores considerably surpassed urban ones (2 points in Quantitative, 4 points in Verbal). Usually, it is the other way round.

I suspect this is because urban areas have been flooded with lower-IQ groups. This is backed by the observation that the difference is smaller in the Quantitative component. As we saw above, both Asians and Blacks are relatively better at Quantitative tasks than they are at Verbal ones.

(Republished from AKarlin.com by permission of author or representative)
 
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One notices a remarkable correlation between this, and the perceived attitudes of local women and their obesity rates.

(The map above was made by RVF commentator “durangotang” based on the geographic data here).

(Republished from AKarlin.com by permission of author or representative)
 
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A few months ago I posted a table and map of Russian IQ’s as derived from regional PISA performance. Those figures are based on Jarkko Hautamäki’s slideshow comparing regional PISA performance in Finland and Russia.

That material is a bit inadequate because, as had been my custom up that point, I was only making IQ estimates based on the Math and Science components of the PISA tests, and avoiding Reading to maintain reverse compatibility with my (now disused, in favor of just IQ) Human Capital Index. In light of some realizations that verbal IQ is no less important than numerical, I have updated the figures to include the verbal component as well. This doesn’t create any radical changes – the overall IQ only drops by 0.3 points – so I reuse the same map.

(Note that the legend on the map isn’t converted to IQ. “PISA scores, mean 500, SD 100, have to be transformed into IQ values, mean 100, SD 15, by adding or subtracting the deviation from the mean in the relationship 100 : 15 = 6,67.”)

Commentary

There are any numbers of comments one can make, but I will confine myself to the most important ones:

(1) In some regions, margins of error are high, as samples were low. Nonetheless, it is still possible to identify some concrete patterns. The overall estimate is very accurate because the sample was N=5,308 and representatively distributed across the country.

(2) Moscow pupils performed very well, at the level of the highest scoring OECD countries like Finland, Taiwan, and Korea. This is especially impressive considering the significant numbers of immigrants in that city from the North Caucasus and Central Asia, who come from poorly-scoring countries and rarely have good Russian. This is surely the result of a century of attracting Russia’s (the USSR’s) cognitive elite.

(3) St.-Petersburg and Tyumen oblast performed above the OECD average, while a few other regions performed at or only slightly below the OECD average.

(4) Among ethnic Russian republics, Siberian regions performed well, while the Urals and southern regions performed badly.

(5) Performance in ethnic minority republics differs dramatically. Many of the Turkic and Finno-Ugric regions, such as Tatarstan, Komi, Chuvashia, and Karelia did well; however, Mari El is a big exception. The Buddhist peoples of Asia, such as Chita oblast (now merged into Zabaykalsky Krai) and the Sakha Republic, performed relatively poorly, as did the Muslim North Caucasus region of Dagestan. Chechnya and Ingushetia would probably score around very low – probably in the mid-80′s. We can be pretty confident about that because their unemployment rates are nearly 50% despite tons of federal transfers.

Bear these figures in mind when considering long-term investments into Russia alongside with their business climate, corruption levels, etc.

PISA-derived IQ of Russian regions

The results by each of the 44 Russian regions which participated in PISA are reproduced below:

IQ
Moscow 106.6
Saint-Petersburg 102.6
Tyumen oblast 100.6
Novosibirsk 100.0
Chelyabinsk oblast 99.7
Omsk oblast 99.3
Samara oblast 99.2
Vladimir oblast 98.9
Tula oblast 98.6
Karelia 98.1
Tatarstan 98.1
Komi 98.0
Tomsk oblast 97.9
Primorie krai 97.2
Krasnoyarsk 97.1
Chuvashia 97.0
Udmurtia 96.4
Sakhalin oblast 96.4
Saratov oblast 96.0
Tambov oblast 95.9
Moscow oblast 95.6
Volgograd oblast 95.5
Vologda oblast 95.3
Kemerovo oblast 95.3
Altai krai 94.9
Astrakhan oblast 94.8
Ryazan oblast 94.7
Kursk oblast 94.6
Khanty-Mansijsk 94.2
Bashkortostan 93.4
Krasnodar 93.3
Perm krai 93.3
Rostov oblast 93.3
Nizhnij Novgorod 93.1
Voronezh oblast 92.7
Orenburg oblast 92.7
Kaluga oblast 91.7
Sverdlovsk oblast 91.6
Ulyanovsk oblast 91.5
Adygea 91.2
Stavropol 91.0
Mari El 90.1
Dagestan 88.7
Chita oblast 88.5
Sakha (Yakutia) 87.7
RUSSIA 96.0

Correlation with economic development

Doing the same exercise as I once did with Italy, the exponential correlation between IQ and GDP per capita (adjusted to reflect local prices; 2008) turns out to be R2=0.5262, if we only take into account those regions whose economies aren’t skewed by substantial natural resource sectors.

This is not as good as Italy’s R2=0.7302, but the result is still an amazingly good one in social sciences. In fact in Russia’s case it’s all the more impressive because its economy was for the most part built up under central planning, which isn’t as good as markets at allocating resources efficiently.

Even under a command economy, the principle still holds: Higher average IQ, higher human capital, greater productivity, greater GDP pre capita.

Other data on the Russian average IQ

(1) The PISA-derived IQ is 96.0.

(2) Richard Lynn estimates Russia’s average IQ to be 96.6 in his 2012 book Intelligence: A Unifying Construct for the Social Sciences.

(3) Heiner Rinderman estimates it at 97.3 in a 2009 paper.

The two most comprehensive authorities on international IQ’s, as well as the most comprehensive international standardized test, are all in agreement that Russia’s current average IQ is in the 96-98 range.

Other data on Russian regional IQ

(1) Map of average Unified State Exam (USE) scores among Russians admitted to institutions of higher education in 2010.

This is a biased sample because it only measures those Russians who were admitted to a university in 2010. It is not indicative of average regional IQ.

Data from Межвузовское исследование «Успеваемость студентов первого курсавысших учебных заведений России».

(2) Here is the same data by Federal District. They are, in order: Volga; North-West; Siberia; Central; Urals; Far East; North Caucasus.

(3) The share of “Olympians” (basically students who did really well and get benefits) in the annual university cohort. By region from top to bottom: Northern Caucasus; South; Far East; Volga; Urals; Siberia; North-West; Central.

There is nothing surprising about this. The Central Federal District contains Moscow. The North-West Federal District contains Saint-Petersburg, and I also suspect that ethnic Russians from the North-West region also have the highest IQ potential of all Great Russians because of admixture with Finno-Ugrics. (Finns and ethnic Estonians both have very high PISA scores).

(4) Unfortunately, Russia does not release regional average USE scores. It does this on purpose to avoid inciting ethnic enmity. (Basically, some regions – most of them non-Russian ones – systematically cheat and inflate their USE scores).

(However, I do recall visiting a site showing the number of people from each region who scored a 100/100 on USE subjects such as the Russian language, math, etc. It is a very rigorous exam and getting full marks on a subject like math is exceedingly hard; only a few hundred manage to do it every year if memory serves right. As IQ distributions are bell curves, it should be theoretically possible to get some idea of regional IQ’s by looking at the perfect scorers per capita rate. To do this however I will need to locate that site.)

Other EE Nations

The Ukraine didn’t participate in PISA 2009, but extrapolating from its TIMSS scores, its IQ would be around 93.1. Belarus would probably be considerably higher, because (1) they are basically genetically identical to Great Russians and Poles, and (2) they have done economically better than Ukraine since the 1990′s despite keeping much of their economy state-owned.

This section will be updated with info on other countries in the near future.

Slavic Genetic IQ Ceiling

The Slavic genetic ceiling appears to be around 100 based on the Czechs and Poles. The average height of young Russian men is about 175cm compared to 179cm-180cm among the Central-Europeans (Poles, Czechs, Slovaks). This discrepancy likely arose from the fact that Russia’s (and Ukraine’s) post-Communist transitions were far more catastrophic than those of the Poles and Czechs, involving a major deterioration in quality of nutrition during the 1990′s when the PISA 2009 cohort was growing up.

Russia’s meat consumption per capita (kg).

Russian nutrition has already returned to First World levels however; for instance, meat , fish, fruit, etc. consumption is now basically the same as in Europe or the US. This means that in the next decade I expect the Flynn Effect to kick off in Russia’s favor, raising its average IQ levels to their theoretical peak of 100 by the 2020′s.

(Republished from AKarlin.com by permission of author or representative)
 
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According to a recent Vzglyad article by Olga Gritsenko titled Universal Stupefaction, no they are not. Here are the cold raw facts:

  • Libraries stock 4% of books published in Ukraine, compared to 18% in Russia and 40% in the US and Canada.
  • The average Ukrainian spends $2.5 on books in one year, compared to $22 in Russia.
  • In 2010/11, the average Ukrainian spent just under 3 hours reading newspapers and journals per week, down 25% from 2007/08. The equivalent figure in Russia is 7 hours.
  • In fairness, their universities are rated higher than Russia’s (as well as Poland’s and the Czech Republic’s) by an outfit called Universitas 21.

Obvious counter-objections don’t explain these shortcomings. Russia has a higher Internet penetration, but nonetheless Russians read a lot more books and newspapers. Nor can a nearly tenfold difference in per capita book sales be purely or even mostly a reflection of lower book prices in the Ukraine.

That said, in a sense these statistics aren’t surprising. According to international student assessments, the level of human capital in Ukraine appears to be similar to the lowest ranked ethnic Russian provinces in Russia. This does not bode well for Ukraine’s future economic growth, given the tight interrelationship between human capital and development, and might go some way to explaining the already big – and growing – prosperity gap with its Moskali neighbors.

(Republished from Da Russophile by permission of author or representative)
 
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[youtube=http://www.youtube.com/watch?v=l2pO6PFYnL4]

h/t Red Hot Russia. :)

(Republished from Da Russophile by permission of author or representative)
 
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It’s one thing if Western journalists and Yukos PR henchmen – if there is indeed any difference – shill for all they’re worth about the travails of Khodorkovsky, the former oligarch doing time for fleecing the Russian Treasury to the tune of billions of dollars, charges he sooner boasts about than denies when given the opportunity to address Russians on national TV. It’s quite another when many ordinary Russians begin to lap up their lies, with a disturbing 10% describing him as a political prisoner in a recent VCIOM poll, and opinions are split 50/50 on a Presidential pardon. Congrats to the PR team, I guess.

Fortunately, at least some court systems still keep their judgments partitioned from the demands of self-interested businesspeople, their PR hacks, libertarians who believe that money should be able to buy a Not Guilty verdict, liberals operating under the delusion MBK is a popular and legitimate political opponent of Putin, etc. According to four (by my count) judgments to date, the European Court of Human Rights (ECHR) is one such institution. The Yukos team managed to get their cases heard at Europe’s highest court of appeal, and they decided that – barring a few administrative irregularities, for which Khodorkovsky was awarded a paltry $35,000 – there was no proof for any of his allegations that the case was politically motivated. This is despite the fact that the ECHR can in no sense be having a Russian government-friendly stance, given the numbers of judgments that have gone against it there.

To wit, despite the swarms of high-profile lawyers batting for Khodorkovsky, they could (1) neither prove that Khodorkovsky didn’t engage in tax evasion – to the contrary, the ECHR sided with Russia’s arguments; (2) not could they evidence their claims that it was a case of selective prosecution, i.e. that MBK’s schemes were prevalent at the time; indeed, the ECHR judges even went so far as to point out that rich businesspeople like MBK have the position and incentive to claim that prosecutions are politically motivated, whereas courts of law need concrete evidence as opposed to the opinions and aspersions that journalists and politicians are free to indulge in.

Nonetheless, op-eds of the WSJ, FT, etc. continue to gloss over the ECHR judgments where they do not ignore them altogether, and paint Khodorkovsky as some kind of principled human rights champion standing up to the dark Chekists who surround Putin (this despite that his right-hand security man Pichugin was convicted to life for contract murders). Masha Gessen, a particularly mendacious piece of work even by the sordid standards of Western journalism on Russia, claimed that the ECHR judgments could even be “read as mandating [Khodorkovsky's] release” in a 5 page hagiography for Vanity Fair.

Since these people seem to feel safe in assuming that no-one will ever read the ECHR judgments (depressingly, it seems to be a valid assumption), I am doing what I can to expose their lies by reprinting the most relevant parts here. Bits of particular interest are bolded.

CASE OF KHODORKOVSKIY v. RUSSIA, 28/11/2011 [AK: As regards whether MBK's prosecution is politically motivated]

VIII. ALLEGED VIOLATION OF ARTICLE 18 OF THE CONVENTION

249. The applicant complained under Article 18 that the State had used the criminal prosecution for a political end and in order to appropriate the company’s assets. Article 18 of the Convention provides:
“The restrictions permitted under [the] Convention to the said rights and freedoms shall not be applied for any purpose other than those for which they have been prescribed.”

A. The parties’ observations

250. The Government submitted that the applicant’s allegations that his criminal prosecution had been politically motivated were not supported by the materials of the case. The Government referred to the judgment delivered in the applicant’s case as proof that the charges against him were serious and genuine. They also described the events which had preceded the start of the investigation into the activities of the Yukos management, especially with regard to the Apatit case.

251. The applicant maintained his allegation that his criminal prosecution had been politically motivated. The applicant submitted that the above materials were powerful evidence of ulterior purposes contrary to Article 18. He had at the very least adduced “prima facie evidence pointing towards the violation of that provision” (Oates v. Poland (dec.), no. 35036/97, 11 May 2000), which the Government had entirely failed to address. The fact that he had been convicted in no way precluded improper motives in bringing the charges. Further, as a matter of Convention law, it was immaterial whether there was evidence justifying the bringing of the prosecution, if, as a matter of fact, it was brought for “other purposes” (see Gusinskiy v Russia, no. 70726/01, 19 May 2004). Indeed, the fact that he had received a long sentence supported the inference of political motivation. The travaux préparatoires for Article 18 indicated that the drafters of this provision were concerned to ensure that an individual was thereby protected from the imposition of restrictions arising from a desire of the State to protect itself according “to the political tendency which it represents” and the desire of the State to act “against an opposition which it considers dangerous”. The applicant maintained his argument that his arrest and consequent detention on 25 October, just a few weeks before the Duma elections on 7 December 2003 and shortly before the completion of the Sibneft/Yukos merger, had been orchestrated by the State to take action against an opposition which it considered “dangerous”, contrary to Article 18.

252. The applicant asserted that those activities had been perceived by the leadership of the country as a breach of loyalty and a threat to national economic security. As a counter-measure the authorities had undertaken a massive attack on the applicant and his company, colleagues and friends.

253. In support of his allegations the applicant submitted reports from international and Russian media, various governmental and non-governmental organisations, the PACE report “On the circumstances surrounding the arrest and prosecution of leading Yukos executives” (published on 29 November 2004 by Mrs Leutheusser-Schnarrenberger, the Special Rapporteur for the Parliamentary Assembly of the Council of Europe), the US Senate resolutions on this subject, European Parliament reports, documents of the UK House of Commons, decisions by the UK courts in cases of extradition of several former Yukos managers to Russia, and decisions by the Cypriot, Dutch, and Swiss courts to the effect that the prosecution of the applicant was politically motivated. In particular, the applicant referred to the words of the Swiss Federal Tribunal, which in August 2007 found that the facts, if analysed together, “clearly corroborate the suspicion that criminal proceedings have indeed been used as an instrument by the power in place, with the goal of bringing to heel the class of rich ‘oligarchs’ and sidelining potential or declared political adversaries”. The applicant also quoted public statements by several high-ranking Russian officials who had acknowledged that “the Yukos case” had political overtones (Mr Gref, Mr Illarionov, Mr Shuvalov, Mr Mironov, Mr Kasyanov and some others). The applicant produced witness statements by several former Yukos managers. He further referred to his submissions within the case Khodorkovskiy v. Russia (no. 2), no. 11082/06, which contain a more detailed analysis of his political activities and business projects.

B. The Court’s assessment

254. The Court reiterates that it has already found that, at least in one respect, the authorities were driven by improper reasons. Thus, the Court found that the applicant had been arrested in Novosibirsk not as a witness but rather as a suspect. However, the applicant’s claim under Article 18 is different from his grievances under Article 5. The applicant maintained that the entire criminal prosecution of Yukos managers, including himself, had been politically and economically motivated. The Court reiterates in this respect that “Article 18 of the Convention does not have an autonomous role. It can only be applied in conjunction with other Articles of the Convention” (Gusinskiy v. Russia, no. 70276/01, § 75, ECHR 2004-IV). In the light of the above the Court will consider the applicant’s allegations under Article 18 of the Convention in conjunction with his complaints under Article 5 of the Convention, cited above.

255. The Court reiterates that the whole structure of the Convention rests on the general assumption that public authorities in the member States act in good faith. Indeed, any public policy or an individual measure may have a “hidden agenda”, and the presumption of good faith is rebuttable. However, an applicant alleging that his rights and freedoms were limited for an improper reason must convincingly show that the real aim of the authorities was not the same as that proclaimed (or as can be reasonably inferred from the context). A mere suspicion that the authorities used their powers for some other purpose than those defined in the Convention is not sufficient to prove that Article 18 was breached.

256. When an allegation under Article 18 is made the Court applies a very exacting standard of proof; as a consequence, there are only few cases where the breach of that Convention provision has been found. Thus, in Gusinskiy v. Russia (no. 70276/01, § 73–78, ECHR 2004-… (extracts), the Court accepted that the applicant’s liberty was restricted, inter alia, for a purpose other than those mentioned in Article 5. The Court in that case based its findings on an agreement signed between the detainee and a federal minister of the press. It was clear from that agreement that the applicant’s detention was applied in order to make him sell his media company to the State. In Cebotari v Moldova (no. 35615/06, §§ 46 et seq., 13 November 2007) the Court found a violation of Article 18 of the Convention in a context where the applicant’s arrest was visibly linked to an application pending before the Court. However, such cases remain rare (see, as an opposite example, Sisojeva and Others v. Latvia [GC], no. 60654/00, § 129, ECHR 2007-II). Particularly, the Court notes that there is nothing in the Court’s case-law to support the applicant’s suggestion that, where a prima facie case of improper motive is established, the burden of proof shifts to the respondent Government. The Court considers that the burden of proof in such a context should rest with the applicant.

257. In the case at hand the applicant referred to various sources which confirm his allegations of “improper motive”. First, he invited the Court to consider the facts surrounding his business and political activities, as well as the major policy lines adopted by the President’s administration at the relevant time. Indeed, those facts cannot be ignored. In particular, the Court acknowledges that the applicant had political ambitions which admittedly went counter to the mainstream line of the administration, that the applicant, as a rich and influential man, could become a serious political player and was already supporting opposition parties, and that it was a State-owned company which benefited most from the dismantlement of the applicant’s industrial empire.

258. On the other hand, any person in the applicant’s position would be able to make similar allegations. In reality, it would have been impossible to prosecute a suspect with the applicant’s profile without far-reaching political consequences. The fact that the suspect’s political opponents or business competitors might directly or indirectly benefit from him being put in jail should not prevent the authorities from prosecuting such a person if there are serious charges against him. In other words, high political status does not grant immunity. The Court is persuaded that the charges against the applicant amounted to a “reasonable suspicion” within the meaning of Article 5 § 1 (c) of the Convention.

259. Nevertheless, the combination of the factors mentioned above have caused many people to believe that the applicant’s prosecution was driven by the desire to remove him from the political scene and, at the same time, to appropriate his wealth. The applicant strongly relies on those opinions; in particular, he relies on resolutions of political institutions, NGOs, statements of various public figures, etc. The Court took note of those opinions. However, it must recall that political process and adjudicative process are fundamentally different. It is often much easier for a politician to take a stand than for a judge, since the judge must base his decision only on evidence in the legal sense.

260. Finally, the Court turns to the findings of several European courts in the proceedings involving former Yukos managers and Yukos assets. Those findings are probably the strongest argument in favour of the applicant’s complaint under Article 18 of the Convention. However, the evidence and legal arguments before those courts might have been different from those in the case under examination. More importantly, assuming, that all courts had the same evidence and arguments before them, the Court reiterates that its own standard of proof applied in Article 18 cases is very high and may be different from those applied domestically. The Court admits that the applicant’s case may raise a certain suspicion as to the real intent of the authorities, and that this state of suspicion might be sufficient for the domestic courts to refuse extradition, deny legal assistance, issue injunctions against the Russian Government, make pecuniary awards, etc. However, it is not sufficient for this Court to conclude that the whole legal machinery of the respondent State in the present case was ab intio misused, that from the beginning to the end the authorities were acting with bad faith and in blatant disregard of the Convention. This is a very serious claim which requires an incontrovertible and direct proof. Such proof, in contrast to the Gusinskiy case, cited above, is absent from the case under examination.

261. In such circumstances the Court cannot find that Article 18 was breached in this case.

CASE OF OAO NEFTYANAYA KOMPANIYA YUKOS v. RUSSIA, 08/03/2012 [AK: As regards whether Yukos' prosecution was lawful]

γ. The Court’s assessment

588. The Court notes that in this complaint the applicant company challenged the lawfulness of the Tax Assessments 2000-2003 only in the part linked to the payment of reassessed taxes. The examination will therefore be confined to the question of the lawfulness of the additional tax liability. The Court further notes that the company did not seem to dispute that the relevant laws made it clear what taxes were due, at what rate and when. Rather, the company claimed that in 2000, 2001, 2002 and 2003 it used lawful “tax optimisation techniques” which were only subsequently condemned by the domestic courts in 2004, 2005 and 2006. It also complained that any existing legal basis for finding the company liable fell short of the Convention requirements in respect of the quality of the law and that, in any event, the application of the relevant laws contradicted established practice. Accordingly, the Court has to determine whether the relevant tax arrangements were domestically lawful at the time when the relevant transactions took place and whether the legal basis for finding the applicant company liable was sufficiently accessible, precise and foreseeable.

589. Turning to the first question, the Court would note at the outset that the applicant company disputed the findings of the domestic courts concerning the nature of relations between the applicant company and its trading entities. In view of its conclusion that the tax assessment proceedings in respect of the year 2000 did not comply with the requirements of Article 6 §§ 1 and 3 (b) of the Convention, the Court is required to decide whether the factual assessments made by the domestic courts could be used for the purposes of its legal analysis under Article 1 of Protocol No. 1. In this respect, the Court reiterates that according to its well-established case-law it is not its task to take the place of the domestic courts, which are in the best position to assess the evidence before them and establish the facts. The Court will not, in principle, intervene, unless the decisions reached by the domestic courts appear arbitrary or manifestly unreasonable (see, mutatis mutandis, Ravnsborg v. Sweden, 23 March 1994, § 33, Series A no. 283-B; Bulut v. Austria, 22 February 1996, § 29, Reports of Judgments and Decisions 1996-II, and Tejedor García v. Spain, 16 December 1997, § 31, Reports 1997-VIII) or if the court decisions have been issued in “flagrant denial of justice” (compare Stoichkov v. Bulgaria, no. 9808/02, § 54, 24 March 2005).

590. Having examined the materials of the case and the parties’ submissions and despite its earlier conclusions under Article 6 §§ 1 and 3 (b) of the Convention in respect of the 2000 Tax Assessment (see paragraph 551), the Court has little doubt that the factual conclusions of the domestic courts in the Tax Assessment proceedings 2000-2003 were sound. The factual issues in all of these proceedings were substantially similar and the relevant case files contained abundant witness statements and documentary evidence to support the connections between the applicant company and its trading companies and to prove the sham nature of the latter entities (see paragraphs 14-18, 48, 62-63, 165, 191-193, 212 and 213). The applicant company itself did not give any plausible alternative interpretation of this rather unambiguous evidence, as examined and accepted by the domestic courts.

591. From the findings of the domestic courts and the parties’ explanations, the Court notes that the company’s “tax optimisation techniques” applied with slight variations throughout 2000-2003 consisted of switching the tax burden from the applicant company and its production and service units to letter-box companies in domestic tax havens in Russia. These companies, with no assets, employees or operations of their own, were nominally owned and managed by third parties, although in reality they were set up and run by the applicant company itself. In essence, the applicant company’s oil-producing subsidiaries sold the extracted oil to the letter-box companies at a fraction of the market price. [AK: Here one is tempted to recall Khodorkovsky's open statement on Russian TV, "I’m uninterested in the cosmetic tricks of the judicial bureaucrats. The statement that oil in Siberia has to be sold at Rotterdam prices is too bizarre to comment on."] The letter-box companies, acting in cascade, then sold the oil either abroad, this time at market price or to the applicant company’s refineries and subsequently re-bought it at a reduced price and re-sold it at the market price. Thus, the letter-box companies accumulated most of the applicant company’s profits. Since they were registered in domestic low-tax areas, they enabled the applicant company to pay substantially lower taxes in respect of these profits. Subsequently, the letter-box companies transferred the accumulated profits unilaterally to the applicant company as gifts. The Court observes that substantial tax reductions were only possible through the mixed use and simultaneous application of at least two different techniques. The applicant company used the method of transfer pricing, which consisted of selling the goods from its production division to its marketing companies at intentionally lowered prices and the use of sham entities registered in the domestic regions with low taxation levels and nominally owned and run by third persons (see paragraphs 14-18, 48, 62-63 for a more detailed description).

592. The domestic courts found that such an arrangement was at face value clearly unlawful domestically, as it involved the fraudulent registration of trading entities by the applicant company in the name of third persons and its corresponding failure to declare to the tax authorities its true relation to these companies (see paragraphs 311, 349-353, 374-380). This being so, the Court cannot accept the applicant company’s argument that the letter-box entities had been entitled to the tax exemptions in questions. For the same reason, the Court dismisses the applicant company’s argument that all the constituent members of the Yukos group had made regular tax declarations and had applied regularly for tax refunds and that the authorities were thus aware of the functioning of the arrangement. The tax authorities may have had access to scattered pieces of information about the functioning of separate parts of the arrangement, located across the country, but, given the scale and fraudulent character of the arrangement, they certainly could not have been aware of the arrangement in its entirety on the sole basis on the tax declarations and requests for tax refunds made by the trading companies, the applicant company and its subsidiaries.

593. The arrangement was obviously aimed at evading the general requirements of the Tax Code, which expected taxpayers to trade at market prices (see paragraphs 395-399), and by its nature involved certain operations, such as unilateral gifts between the trading companies and the applicant company through its subsidiaries, which were incompatible with the rules governing the relations between independent legal entities (see paragraph 376). In this connection, the Court finds relevant the warning given by the company’s auditor about the implications of the use of the company’s special fund during the year 2002 (see paragraphs 206-209) and is not persuaded by the applicant company’s reference to case no. A42-6604/00-15-818/01 (see paragraphs 356-357), the expert opinion of its counsel (see paragraph 577) and its reliance on Article 251 (1) 11 of the Tax Code (see paragraph 376).

594. By contrast to the Tax Assessments in issue, the respondent entity in case no. A42-6604/00-15-818/01 was not alleged to have been part of a larger tax fraud and the Ministry failed to prove that it had been sham. The courts established that the entity had some assets, employees and a bank account at the place of its registration and dismissed the Ministry’s claims. As regards the expert opinion and the company’s reference to Article 251 (1) 11 of the Tax Code, the Court finds them irrelevant as they refer to the relations of openly associated companies and not, as was the case at issue, to the use of sham entities fraudulently registered in the name of certain third parties. Thus, the Court cannot agree with the applicant company’s allegation that its particular way of “optimising tax” had been previously examined by the domestic courts and upheld as valid or that it had used lawful “tax optimisation techniques” which were only subsequently condemned by the domestic courts. The above considerations are sufficient for the Court to conclude that the findings of the domestic courts that applicant company’s tax arrangements were unlawful at the time when the company had used them, were neither arbitrary nor manifestly unreasonable.

595. The Court will now turn to the question whether the legal basis for finding the applicant company liable was sufficiently accessible, precise and foreseeable. In this connection, the Court notes that in all the Tax Assessments (see paragraphs 14-18, 48, 62-63, 165, 191-193, 212 and 213) the domestic courts essentially reasoned as follows. The courts established that the trading companies had been sham and had been entirely controlled by the applicant company and accordingly reclassified the transactions conducted by the sham entities as transactions conducted in reality by the applicant company.

596. The courts first decided that the transactions of the sham entities failed to meet the requirements of Article 39 of the Tax Code defining the notion of a sales operation (see paragraphs 48 and 324) as well as Article 209 of the Civil Code describing essential characteristics of an owner of goods (see paragraph 48 and 381). In view of the above and relying on Article 10 (3) of the Civil Code which established a refutable presumption of good faith and reasonableness of actions of the parties in commercial transactions (see paragraph 48 and 382-383), the courts then changed the characterisation of the sales operations of the sham entities. They decided that these were in reality conducted by the applicant company and that it had been incumbent on the latter to fulfil the corresponding obligation to pay various taxes on these activities. Finally, the courts noted that the setting up and running of the sham arrangement by the applicant company resulted in an understating of the taxable base of its operations and, as a consequence, the intentional non-payment of various taxes, which was punishable as a tax offence under Article 122 of the Tax Code (see paragraph 400).

597. Having regard to the applicable domestic law, the Court finds that, contrary to the applicant company’s assertions, it is clear that under the then rules contractual arrangements made by the parties in commercial transactions were only valid in so far as the parties were acting in good faith and that the tax authorities had broad powers in verifying the character of the parties’ conduct and contesting the legal characterisation of such arrangements before the courts. This was made clear not only by Article 10 (3) of the Civil Code relied on by the domestic courts in the Tax Assessment proceedings, but also by other relevant and applicable statutory provisions which were available to the applicant company and other taxpayers at the time. Thus, Article 45 (2) 3 of the Tax Code explicitly provided the domestic courts with the power to change the legal characterisation of transactions and also the legal characterisation of the status and activity of the taxpayer, whilst section 7 of the Law on the Tax Authorities of the Russian Federation granted the right to contest such transactions to the tax authorities (see paragraph 393). In addition, the case-law referred to by the Government indicated that the power to re-characterise or to cancel bad faith activities of companies existed and had been used by the domestic courts in diverse contexts and with varying consequences for the parties concerned since as early as 1997 (see paragraphs 382-393 and paragraphs 428-468). Moreover, in a number of its rulings, including decision of 25 July 2001 no. 138-0 specifically relied upon by the domestic courts in the Tax Assessment proceedings against the applicant company (see paragraphs 384-387), the Constitutional Court confirmed the significance of this principle, having mentioned various possible consequences of a taxpayer’s bad faith conduct.

598. In so far as the applicant company complained that the bad faith doctrine had been too vague, the Court would again reiterate that in any system of law, including criminal law, there is an inevitable element of judicial interpretation and there will always be a need for elucidation of doubtful points and for adaptation to changing circumstances. In order to avoid excessive rigidity, many laws are inevitably couched in terms which, to a greater or lesser extent, are vague and whose interpretation and application are questions of practice (see, among other authorities, Sunday Times, cited above, § 49 and Kokkinakis, cited above, § 40). On the facts, it would be impossible to expect from a statutory provision to describe in detail all possible ways in which a given taxpayer could abuse a legal system and defraud the tax authorities. At the same time, the applicable legal norms made it quite clear that, if uncovered, a taxpayer faced the risk of tax reassessment of its actual economic activity in the light of the relevant findings of the competent authorities. And this is precisely what happened to the applicant company in the case at hand.

599. Overall, having regard to the margin of appreciation enjoyed by the State in this sphere and the fact that the applicant company was a large business holding which at the relevant time could have been expected to have recourse to professional auditors and consultants (see Špaček, s.r.o., cited above, § 59), the Court finds that there existed a sufficiently clear legal basis for finding the applicant company liable in the Tax Assessments 2000-2003.

600. Lastly, the Court observes that the applicant company made a number of additional arguments under this head. In particular, it also alleged that there was no basis in law to deny the repayment of VAT in respect of the export of oil and oil products, that the domestic courts had failed to apply Articles 20 and 40 of the Tax Code, that it should have been dispensed from payment of interest surcharges under Article 75 (3) of the Tax Code and that in respect of the year 2000 the company had been subjected to double taxation in respect of the profits of the sham entities.

601. The Court notes that both Section 5 of Law no. 1992-1 of 6 December 1991 “On Value-Added Tax” governing the relevant sphere until 1 January 2001 as well as Article 165 of the Tax Code applicable to the subsequent period provided unequivocally that a zero rate of value-added tax in respect of exported goods and its refund could by no means be applied automatically, and that the company was required to claim the tax exemptions or refunds under its own name under the procedure set out initially in Letter no. B3-8-05/848, 04-03-08 of the State Tax Service of Russia and the Ministry of Finance and subsequently in Article 176 of the Tax Code to substantiate the requests in order to obtain the impugned refunds (see paragraphs 326-336). In view of the above, the Court finds that the relevant rules made the procedure for VAT refunds sufficiently clear and accessible for the applicant company to able to comply with it.

602. Having examined the case file materials and the parties’ submissions, including the company’s allegation made at the hearing on 4 March 2010 that it had filed the VAT exemption forms for each of the years 2000 to 2003 on 31 August 2004, the Court finds that the applicant company failed to submit any proof that it had made a properly substantiated filing in accordance with the established procedure, and not simply raised it as one of the arguments in the Tax Assessment proceedings, and that it had then contested any refusal by the tax authorities before the competent domestic courts (see paragraphs 49 and 171, 196, 196 and 216). The Court concludes that the applicant company did not receive any adverse treatment in this respect.

603. As regards the company’s argument that Articles 20 and 40 of the Tax Code should have been applied by the domestic courts in their case and that the Ministry’s claims were inconsistent with the above provisions, the Court notes that the Ministry and the domestic courts never relied on these provisions and there is nothing in the applicable domestic law to suggest that they had been under a legal obligation to apply these provisions to the applicant company’s case. Thus, it cannot be said that the authorities’ failure to rely on these provisions rendered the Tax Assessments 2000-2001 unlawful.

604. Finally and in so far as the company disagreed with the interpretation of Article 75 (3) of the Tax Code by the domestic courts and also alleged to have been subjected to double taxation, the Court would again reiterate that it is not its task to take the place of the domestic courts, which are in the best position to assess the evidence before them, establish the facts and to interpret the domestic law. On the facts, the former provision only applied to cases where the taxpayer was unable to pay the tax debt solely due to the seizure of its assets and cash funds (see paragraph 402). The domestic courts established that the company had been unable to pay because of the lack of funds and not because of the injunctions and refused to apply Article 75 (3) of the Tax Code in the applicant’s case (see paragraph 216). The Court does not find this conclusion arbitrary or unreasonable. Likewise, the Court finds nothing in the parties’ submissions or the case file materials to cast doubt on the findings of the domestic courts, which specifically established that the Ministry took account of the sham entities’ profits in calculating their claims so as to avoid double taxation (see paragraph 49).

605. Overall, the Court finds that, in so far as the applicant company’s argument about the allegedly unreasonable and unforeseeable interpretation of the domestic law in the Tax Assessments 2000-2003 is concerned, the Tax Assessments 2000-2003 complied with the requirement of lawfulness of Article 1 of Protocol No. 1.

(b) Whether the Tax Assessments 2000-2003 pursued a legitimate aim and were proportionate

606. The Court is satisfied that, subject to its findings in respect of the lawfulness of fines for the years 2000 and 2001 made earlier, each of the Tax Assessments 2000-2003 pursued a legitimate aim of securing the payment of taxes and constituted a proportionate measure in pursuance of this aim. The tax rates as such were not particularly high and given the gravity of the applicant company’s actions there is nothing in the case file to suggest that the rates of the fines or interest payments can be viewed as having imposed an individual and disproportionate burden, as such, on the applicant company (see Dukmedjian v. France, no. 60495/00, §§ 55-59, 31 January 2006).

(c) Conclusion concerning the compliance with Article 1 of Protocol No. 1 as regards the Tax Assessments 2000-2003

607. Overall, the Court finds that there has been a violation of Article 1 of Protocol No. 1 on account of the 2000-2001 Tax Assessments in the part relating to the imposition and calculation of penalties. Furthermore, the Court finds that there has been no violation of Article 1 of Protocol No. 1 as regards the rest of the 2000-2003 Tax Assessments.
2. Compliance with Article 14, taken in conjunction with Article 1 of Protocol No. 1

(a) The applicant company’s submissions

608. The applicant company argued that the courts’ interpretation of the relevant laws had been selective and unique, since many other Russian companies such as Sibneft and TNK International Ltd. had also used domestic tax havens.

609. The company also submitted that the authorities had tolerated and even endorsed the tax optimisation techniques used by the applicant company in that they had accepted the applicant company’s and its trading companies’ tax returns and payments on a regular basis, and the company’s rate of tax payment had been comparable to or even higher than that of its competitors. In this connection, the applicant company relied on statistical data contained in a report by the Centre for Development, a report of the Financial Research Institute and reports of the Accounts Chamber of Russia. The company also under this heading argued that the legislative framework had permitted the company to use such techniques and that the interpretation of the domestic law in its case had been unique, selective and unforeseeable.

(b) The Government’s submissions

610. The Government responded that the allegations that other taxpayers may have used similar schemes could not be interpreted as justifying the applicant company’s failure to abide by the law. They further contended that the occurrence of illegal tax schemes at a certain stage of Russia’s historical development was not due to failures or drawbacks in the legislation, but rather due to “bad-faith” actions by economic actors and weakened governmental control over compliance with the Russian tax legislation on account of objective criteria, such as the 1998 economic crisis and the difficulties of the transition period.

611. At present, the Government was constantly combating tax evasion and strengthening its control in this sphere. They also referred to statistical data by AK&M and some other news agencies in 2002, which had reported that OAO LUKOIL and OAO Surgutneftegas, two other large Russian oil producers, had posted sales proceeds of RUB 434.92 billion and RUB 163.652 billion and paid RUB 21.190 billion and RUB 13.885 billion in profit tax respectively, whilst the applicant company had posted sales proceeds of RUB 295.729 billion and paid only RUB 3.193 billion in profit tax. The Government submitted that at least two Russian oil majors, OAO Surgutneftegaz and OAO Rosneft, had never engaged in such practices, whilst some, in particular OAO Lukoil, had ceased using them in 2002.

(c) The Court’s assessment

612. The Court will examine this grievance under Article 14 of the Convention, taken in conjunction with Article 1 of Protocol No. 1. This former provision reads:
Article 14 of the Convention

“The enjoyment of the rights and freedoms set forth in [the] Convention shall be secured without discrimination on any ground such as sex, race, colour, language, religion, political or other opinion, national or social origin, association with a national minority, property, birth or other status.”

613. Before considering the complaints made by the applicant company, the Court would reiterate that Article 14 does not forbid every difference in treatment in the exercise of the rights and freedoms recognised by the Convention (see, for example, Lithgow and Others, cited above, § 117). It safeguards persons (including legal persons) who are “placed in analogous situations” against discriminatory differences of treatment; and, for the purposes of Article 14, a difference of treatment is discriminatory if it “has no objective and reasonable justification”, that is, if it does not pursue a “legitimate aim” or if there is not a “reasonable relationship of proportionality between the means employed and the aim sought to be realised” (see, amongst many authorities, Rasmussen v. Denmark, 28 November 1984, §§ 35 and 38, Series A no. 87). Furthermore, the Contracting States enjoy a certain margin of appreciation in assessing whether and to what extent differences in otherwise similar situations justify a different treatment in law; the scope of this margin will vary according to the circumstances, the subject-matter and its background (ibid., § 40).

614. The Court would reiterate that nothing in the case file suggests that the applicant company’s tax arrangements during the years 2000-2003, taken in their entirety, including the use of fraudulently registered trading companies, were known to the tax authorities or the domestic courts and that they had previously upheld them as lawful (see paragraphs 592-594). It thus cannot be said that the authorities passively tolerated or actively endorsed them.

615. As regards the applicant company’s allegation that other domestic taxpayers used or continue to use exactly the same or similar tax arrangements as the applicant company and that the applicant company was the only one to have been singled out, the Court finds that the applicant company failed to demonstrate that any other companies were in a relevantly similar position. The Court notes that the applicant company was found to have employed a tax arrangement of considerable complexity, involving, among other things, the fraudulent use of trading companies registered in domestic tax havens. This was not simply the use of domestic tax havens, which, depending on the exact details of an arrangement, may have been legal or may have had some other legal consequences for the companies allegedly using them. The Court notes that the applicant company had failed to submit any specific and reliable evidence concerning such details. It further notes that it cannot be called upon to speculate on the merits of the tax arrangements of third parties on the basis of data contained in non-binding research and information reports and that therefore it cannot be said that the situation of these third parties was relevantly similar to the situation of the applicant company in this respect.

616. The Court concludes that, in so far as the complaint about discriminatory treatment is concerned, there has been no violation of Article 14 of the Convention, taken in conjunction with Article 1 of Protocol No. 1.

(Republished from Da Russophile by permission of author or representative)
 
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Despite the unremitting hostility of its Russian neighbor, which crescendoed in a military occupation of a chunk of its territories, plucky Georgia’s commitment to reform and democratic values will ensure its rapid development into a “booming Western-style economy.” Under its charismatic Western-trained President, Saakashvili, it has rooted out corruption, ushered in untold prosperity and freedoms, and left dictatorial Russia in the dust. ““There are barbarians there and civilization here,” summarizes Saakashvili himself, “There they have mongoloid brutality and ideology while here we have the true, the oldest Colchis Europe, the most ancient civilization.”

At least, that’s the picture you might have of Georgia if you read Saakashvili’s speeches, Western op-eds, Russian liberals like Cato Institute flunky and global warming denier Andrey Illarionov, and a sundry host of Georgian ambassadors and lobbyists shilling for all they’re worth in major Western newspapers. But rhetoric and reality can be two very different things. To what extent do objective indicators (e.g. statistics) bear out this neocon vision of Tbilisi as the shining city on the Caucasian hills?

By the numbers… Let’s start with the economy. Saakashvili deserves some credit for maintaining respectable GDP growth rates, albeit they are far from the awe-inspiring figures of China or, for that matter, several other post-Soviet republics. From 2004 to 2011, the Georgian economy grew at an average of 6.0% per annum, which is only modestly higher than Russia’s 4.5%.

However, this comparison becomes much more unfavorable once Georgian growth is adjusted for other factors. First, Russia is already much richer than Georgia – its GDP, however you measure it, is more than three times higher – so by basic economic theory, ceteris paribus its growth rate should be much higher as poorer countries have many more easy opportunities to increase productivity. (Illarionov, by the way, is ignorant of convergence theory, a fairly basic macroeconomic concept; it’s frightening that this “economist”, who is more accurately a libertarian ideologue, was once a major economic adviser to the Russian government). Second, Georgia had by far the biggest and sharpest decline in GDP during the early 1990′s of all the Soviet republics, and even as of this year, its gross output is still 20% below the peak levels of 1989. This should also, in principle, help Georgia grow much faster than Russia – which surpassed its peak Soviet-era output sometime in the mid-2000′s – because in a sense it is still “recovering” from an economic depression.

A much more appropriate comparison would be with Armenia. Both are in the unstable Caucasus region. Georgia has intermittently faced sanctions from Russia, whereas Armenia is under permanent economic blockade from Turkey and Azerbaijan. Unlike Azerbaijan, neither Tbilisi nor Yerevan enjoy an oil windfall. Their GDP per capita is almost exactly the same: About $3000 nominal, and $5000 in purchasing power adjusted dollars. Unlike Georgia, Armenia has recovered its Soviet-era production levels and then some; its GDP is now more than 50% as big as in 1989, so it is well past the period of mere “recovery growth”. Both countries suffered from destructive wars in the early 1990′s, and both remain highly militarized to this day. Nonetheless, with the exception of the past three years, when it was crushed by the economic crisis, Armenia has consistently clocked up higher GDP growth rates than Georgia. In sum terms, during the 2004-2011 period, both countries grew at approximately the same pace: 6.0% for Georgia, 6.3% for Armenia.

In the graph above, GDP per capita is indexed to 100 at 2003 for a range of post-Soviet countries. It is clear that Estonia and Armenia, despite their deep recent recessions, are highly successful transition economies; both are a lot more prosperous now than in 1989. Russia is only moderately successful. Along with Ukraine, Georgia is still well below Soviet-era peak output levels, and its growth under Saakashvili wasn’t exceptional by the standards of other post-Soviet republics, despite its twin advantages of starting from a low base (unlike Russia, Estonia) and still being in the process of recovering lost output (unlike Armenia).

Another relevant comparison is with the “corrupt” and “nepotistic” Shevardnadze administration from 1995-2003, which was overthrown to great fanfare in the “Rose Revolution”. What was Georgia’s growth rate then? 5.9%. That is within rounding error of growth under Saakashvili. It should furthermore be noted that growth was accelerating throughout Shevardnadze’s Presidency, reaching a peak of 11.1% in 2003. So there are valid questions as to the extent the high growth rates of the early Saakashvili Presidency were due to his neoliberal reforms.

What about life for ordinary people? There is no doubt that the average Georgian became significantly better off, as was the case everywhere in the former USSR during this period. Georgian statistics show nominal wages almost quadrupling from 2004-2010, from 157 lari to 598 lari per month, albeit adjusting for inflation would reduce it to only a bit better than a doubling.

However, higher wages can only be enjoyed by people who actually get them. During the same period, unemployment grew from 12.6% to 16.3%. Despite neoliberal reforms that undercut the bargaining power of labor, unemployment in Georgian urban areas – approaching 40% in the capital, Tbilisi – is now as prevalent as in the most impoverished provinces of the Russian Caucasus. About half of the Georgian labor force is “self-employed” in sustenance farming, which is a higher figure than two decades ago. In contrast, unemployment in both neighboring Armenia, and “corrupt” and “stagnating” Russia is around 6%-7%.

So bearing in mind actual statistics, does Georgia still deserve the status of a “miracle economy” conferred to it by libertarians and neocons? Don’t get me wrong, 6% is not bad. It’s no worse than under (maligned) Shevardnadze, and modestly better than the 4% average growth rates observed in Moldova, the very worst performer in the entire post-Soviet space. But even so, Georgia is not going to catch up with the developed world at its current pace of development – not like China, which has comparable income levels but is growing at 10% rates, or Russia, which is already three to four times richer.

Moving on, Georgia has also been lauded for excoriating previously endemic corruption, and becoming one of the world’s most “economically free” and business-friendly locations. The latter may well be true; objective ratings such as the World Bank’s Ease of Doing Business, which measure the number of days and permission slips required to start a business, place Georgia 16th globally. This seems a genuine achievement, albeit as real world data shows, these things have at best only a marginal influence on economic growth rates, which are primarily determined by a country’s initial development level relative to the quality of its educational human capital.

On the Corruption Perceptions Index, Georgia improved its score from 1.8 in 2003 to 4.1 by 2011, which is a very significant change (in contrast, Russia languishes at 2.4, and Armenia at 2.6). But some Georgian businesses report government agents demanding political “donations” to Saakashvili’s ruling party to avert hostile raids, and in any case it must be borne in mind that the CPI is a proxy of corruption perceptions, not corruption realities per se. The CPI rating can thus be unduly influenced by good PR and lobbying. As a Western-trained lawyer, Saakashvili appreciates their importance, and has over the years paid millions of dollars to PR firms like Aspect Consulting, Orion Strategies, Public Strategies, and the Glover Park Group to burnish Georgia’s reformist, anti-corruption and democratic image abroad.

Other indicators that are not as reliant on the perceptions of anonymous experts show a somewhat different picture. In the Global Integrity Report, which is based on blind review, Georgia does only modestly better than Russia, scoring 76/100 as compared to Moscow’s 71/100. On the Open Budget Index, which assesses the transparency of government accounts, Russia actually does better, scoring 60/100 to Georgia’s 55/100. And according to Transparency International, the same outfit behind the CPI, the percentage of Georgians who reported paying a bribe in the past year in 2004 was only 6%; as of 2010, this had declined to 3%. A positive and appreciable change to be sure, but the data indicates that petty corruption was not that much of a problem in Georgia to start off with.

Didn’t Saakashvili at least democratize Georgia? Well, no. The fact of the matter is that Georgia was already a democracy under Shevardnadze, if a highly imperfect and illiberal one. The same remains true today. Unofficial protests are brutally broken up, independent TV stations have their licenses revoked, and opposition figures have their citizenships canceled or forced into exile abroad. Georgia has also become a revisionist and highly nationalist power under the charismatic President, whose actions have ranged from the petty and incompetent, e.g. blowing up a Soviet war memorial to Georgian war dead, and in the process killing a mother and her daughter in the blast, to the criminally deranged and incompetent, e.g. the invasion of South Ossetia and carpet bombing of Tskhinvali, even though virtually no Ossetian wants to live in a Greater Georgia.

If one doubts that Saakashvili is in fact rather far from being a nice liberal democrat, all one has to do is look at the indicators of political freedoms. In the Polity IV rankings, the most comprehensive democracy indicators database assembled by political scientists, Georgia increased from 5/10 to 6/10 on a scale from -10 (zero democracy) to 10 (full democracy) under Saakashvili. This is hardly the glorious transformation the Rose Revolution is often made out to be; nor is it very much different from the Evil Empire’s. Russia’s current score is 4/10, for whatever reason down from 6/10 after Medvedev’s election in 2008.

There are however two socio-economic indicators under Saakashvili that did register highly visible, concrete changes. If not for the better.

From 36% in 1991, the tertiary enrollment rate remained steady until the late 1990′s, when it began to grow, reaching 43% by 2003 and peaking at 47% in 2005. Then it plummeted to 25% by 2009, edging up to 28% in 2010. This seems to have been in substantial part due to an increase in the cost of annual university tuition from 500-600 lari in 2003 to 3000-4000 lari by 2009, an eight-fold increase far exceeding the quadrupling of salaries during the same period (even disregarding increased unemployment). Bearing in mind that the average salary was 557 lari in 2009, it is clear that for many families university education became unaffordable. Government grants have also plummeted: From wholly financing the educations of 9,700 students in 2003, by 2009 they were subsidizing only half the tuition costs of 1,000 students. University access has dropped by more than 80% in some regions.

This is particularly catastrophic for Georgia because international student assessments indicate that their schools are almost useless at imparting real world skills. According to PISA 2009, only “31% of [Georgian] students are proficient in mathematics at least to the baseline level at which they begin to demonstrate the kind of skills that enable them to use mathematics in ways that are considered fundamental for their future development.” The equivalent figure for Russia was 72%, and about 78% for the OECD as a whole. On Reading, Math, and Science, Georgian students came, respectively, 67th, 66th, and 70th out of the 75 countries in the PISA assessment. Other international student assessments paint a similarly dire picture. For instance, in TIMMS 2007, Georgian students got an average score of 410 in the Math component, relative to Armenia’s 499 and Russia’s 512. The gap is not substantially different in the Science component, or in the PIRLS 2006 literacy survey. This is unlikely to improve any time soon, as under Saakashvili, the number of public libraries more than halved.

While Georgia was disinvesting in its future workforce, tertiary enrollment has risen in Georgia’s neighbors. In Armenia, it rose from 24% in 1998 to 52% by 2010; the percentage of Russians undergoing university education rose from 55% in 2000 to 76% by 2009. That is because the leaderships of these countries, as in much of the rest of the civilized world, appreciate the importance of human capital to fostering economic growth. In Saakashvili’s world, presumably, praying to the souls of Hayek, Mises and Rothbard would suffice. More education is the road to serfdom.

But in the end, I guess it’s all a matter of priorities. The Georgian army and police are now well fed. Who needs math, science, and literacy anyway? “Military-patriotic education means training in civil defense,” Saakashvili says, “Stimulating soldierly spirit, which historically was always in nature of people in Georgia; as well as courses in Georgia’s military history” is what is really important. Hear hear? Meanwhile, the prison population has tripled from 182/100,000 in 2004, to 536/100,000 in 2011. Under Saakashvili’s democratic guidance, Georgia has acquired the dubious distinction of being the European country with the most prisoners per capita, displacing Russia (the irony!) in the process.

This is not to say that Georgia is a corrupt, stagnant tinpot dictatorship, its tottering foundations stabilized by huge inflows of American capital (though the latter sums, ranging in the billions, are very substantial relative to the tiny size of the Georgian economy). Saakashvili has maintained a mediocre level of economic growth, wages have risen substantially, and corruption has been reduced. Nonetheless, its performance is far less impressive than that of a comparable neighbor, Armenia, and on almost every socio-economic indicator it massively lags Russia. It is a democracy, but the quality of its democracy is not substantially better than that of Russia, which countless Western pundits describe as an authoritarian kleptocracy returning to the USSR.

In place of building the foundations for sustained long-term growth, Saakashvili has instead been busy undermining what little of it exists. No amount of reforms to make life easier for capitalists can compensate for the abysmal quality of the Georgian education system, and Saakashvili’s wanton curtailment of the only partial remedy for it, university access. He is at essence a blowhard, passable perhaps as a mercenary lawyer, but utterly unqualified for the work of statesmanship. He pontificates about building huge new cities on swampland (complete with “seven star hotels”), demands Slavic countries stop calling his country “Gruzia” as they have done for centuries, and arrests Russian tourists who dare holiday in his country for the mere suspicion of having passed through breakaway Abkhazia. Russian language schools are closed down, and the main Tbilisi boulevard is renamed in honor of G.W. Bush, while the latter was still President to boot!

What emerges of Saakashvili is a small, petty and vainglorious man, who blames all of Georgia’s problems on his “Mongoloid” northern neighbor and deflects all criticism of his ham-fisted rule by arresting the critics as Russian spies. He presides over “Potemkin Georgia”*, hyped as a tiger economy of the Caucasus by ideologues and paid-up PR men, but in reality fast becoming an isolated Cuba of the Caucasus.

If the good people of Georgia accede to this, it is of course their right as a sovereign people. It is also understandable that neocons who appreciate his irrevocably pro-Western science, libertarians dreaming of culling labor laws and defunding public services, sundry Russophobes operating on an the-enemy-of-my-enemy-is-my-friend basis, and plain paid-up PR men would defend Saakashvili’s record. But it is also then incumbent on people of honesty and integrity to publicize the lies of his apologists (Andrey Illarionov, David Hamilton, Garry Kasparov, Valeriya Novodvorskaya and Vladimir Bukovsky, Giorgi Badridze, Randy Scheunemann, Jennifer Rubin, Eli Lake, Melik Kalyan, etc), and continue revealing Saakashvili for what he really is – an emperor with no clothes.

Because even if Saakashvili is hellbent on undermining the future of his own country, he should not be allowed to do the same again to Abkhazia or South Ossetia – or for Potemkin Georgia to be portrayed as a model of good and effective governance for other countries to follow.

* Yes, I’m aware that “Potemkin villages” are probably a historical urban legend. But as the term is regularly and uncritically used as regards Russia in the Western press, I don’t see the problem in turning the tables on them.

(Republished from Da Russophile by permission of author or representative)
 
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One of the key criticisms of my last post on the tight connections between (educational) human capital and economic performance is that correlation need not imply causation. An alternate (and PC-compliant) explanation is that “you get the education system you could afford, and the level of human capital in the kids is mostly determined by the efficiency of the schooling system.” Is there any evidence to support this argument?

italy-wealth-education

As a country with a long history of normal capitalist development, and with no regions enjoying particularly lucrative resource windfalls, it is not a surprise to see a close exponential correlation between my Human Capital Index (see methodology here) and Italy’s GDP (PPP, in US dollars) per capita (R2=0.7302).

italy-wealth-education-4

Furthermore, when we note that one of the major outliers hosts the Italian capital, and remove it, the correlation becomes even more impressive (R2=0.8221), equaling that of the Capitalist Normal countries as a group. Removing the other major outlier, Apulia, and the Germanic South Tyrol, makes the correlation almost perfect (R2=0.9461).

Is there anything like that kind of correlation between public expenditure per pupil (which according to Italian statistics has an almost perfectly linear relationship to numbers of teachers per pupil, which is one of the best proxies we have for school quality) and academic results? Not at all. (R2=0.0544, linear)

italy-education-performance-spending

This does not strictly prove anything, but it is a good argument for the relative lack of importance of funding levels towards academic success. There appear to be hard limits to the human capital money can buy. After all, Italy’s education system is highly centralized, with a difference of a mere 20% between the highest and lowest spending provinces on education (it is also well known that it is socio-culturally variegated to a much greater extent than your typical European country, which makes it a good laboratory for social science experiments). Nonetheless, they produce a wide range of outcomes; for instance, whereas the best-performing provinces like Trentino and Friuli-Venezia Giulia get results similar to that of the Netherlands, the worst-performing ones like Calabria and Sicily have countries like Turkey and Bulgaria for company.

(A quick note about the outliers. The South Tyrol is a minor positive outlier; perhaps it can be explained by its Germanic background with its special discipline and technical skills culture. The big positive outlier, Lazio, isn’t a mystery; it hosts the capital Rome, and these regions always tend to have their GDP’s artificially boosted by the massive state presence in them. But most curious is Apulia, a massively negative outlier, which hugely outperforms all its Southern neighbors but remains one of the three poorest Italian provinces, its GDP (PPP) per capita comparable to Poland’s. Anyone have theories on why that is the case?)

Education is very important, being intricately connected with potential for productivity growth and increasing prosperity; it deserves a lot of funding, and optimizing reforms. But as Italy glaringly demonstrates, the potential for developing human capital is constrained by some combination of social, cultural, and ethnic factors; factors that can be partially mitigated but not overcome by throwing money at them. There are plenty of other examples to back this up. For instance, inner city schools in the US get a lot more in the way of funding than suburban ones – let alone average Chinese schools, which have been de-emphasized in the reform era. Nonetheless, the human capital generated in the latter two institutions far exceed that generated in the US inner city schools.

Next in this series: How to reconcile Israeli idiocy (as measured by the HCI) with Jewish intelligence (as measured by IQ tests, Nobel Prize winners, etc) – any preliminary theories?, and perhaps on how they also challenge some stereotypes about Georgians.

(Republished from Sublime Oblivion 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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Иn the wake of the 2009 recession, declinist rhetoric has come to dominate discussion of Russia’s economic prospects. Jim O’Neill, the founder of the BRIC’s concept, has his work cut out defending Russia’s expulsion from the group in favor of Indonesia, Mexico, or some other random middle-sized country. Journalists in the Western media claim its economy is “not growing”, as do liberal Russian newspapers such as Vedomosti. Comparisons between Putin and Brezhnev (who presided over the Soviet Union’s period of stagnation, or zastoi) are piling up. Even President Medvedev isn’t helping the situation, telling a forum of international businesspeople that Russia’s “slow growth” hides stagnation (good job promoting your country, DAM! not….).

I don’t want to exchange rhetorical barbs in this post (which you may note is not tagged as a “rant“), and my skills at mockery and picking apart tropes aren’t nearly as well developed as those of Mark Adomanis or Kremlin Stooge, so I’ll do what I do best and go straight to the statistics. And so we have Fact #1: what is described as stagnation for Russia is a growth rate of 4%. It grew 4.0% for 2010. It was 4.1% in Q1 2011, and the government predicts it will be 4.2% for the whole year. The World Bank predicts 4.4% in 2011, 4.0% in 2012; the OECD expects 4.9% in 2011 and 4.5% in 2012; and the IMF forecasts 4.8% in 2011, 4.5% in 2012, tapering off to less than 4.0% in the “medium-term.”

This does not strike me as being particularly bad by global standards. This is obviously no miracle economy of Chinese-like 10% growth rates, but Russia (4.4%; 4.0%) does not compare badly to the World Bank’s projected growth for other typical middle-income countries such as Turkey (4.1%; 4.3%), Thailand (3.2%; 4.2%), Brazil (4.4%; 4.3%), Mexico (3.6%; 3.8%), or South Africa (3.5%; 4.1%). Facing real stagnation, many countries in the developed world such as the UK could only wish for Russia’s growth rate; though this is an unfair comparison, because Russia is poorer and can therefore find it easier to grow faster (see economic convergence), it is not less unfair comparing Russia to countries such as India (8.4%; 8.7%) or Indonesia (6.2%; 6.5%) because the latter are so much poorer than Russia in their turn.

This discussion suggests that CONTEXT is vital when discussing the degree of stagnation in a country. One of the two major factors here is the current GDP of the country in question; real GDP, that is, because that is what growth refers to (i.e. if a country devalues its currency by half but output remains constant, then nominal GDP will fall by half but real GDP will remain constant; as such, real GDP per capita is also the better proxy for living standards and economic sophistication). Now there are two major estimates by international organizations of Russia’s real GDP. The IMF estimates it at $15,800 as of 2010, whereas the World Bank believes it is $19,800 (relying on recent joint research by OECD-Eurostat-Rosstat). There are grounds to believe that the latter is more accurate because the international price comparison data that goes into real GDP estimates is much more recent for the World Bank*. But regardless of which one you use, Russia’s GDP is still much higher than the other emerging markets or BRIC’s with which it is so frequently compared to – Brazil has $11,100, China has $7,500, Indonesia has $4,400, and India has $3,600.

This is extremely important for two reasons. First, it is much harder to grow quickly when you are already a mostly developed country (like Russia, Poland, Korea) than when you are a mid-level developing country (China, Brazil) or a poor developing country (India, Indonesia). The most important reasons are: (1) The potential to achieve rapid growth by transferring your population from rural agriculture to urban industry and services becomes exhausted; (2) the services sector, where productivity can’t be improved as fast as in industry, assumes a bigger share of GDP; (3) most importantly, those countries are far closer to the technological frontier or “best practice”, and hence must increasingly innovate their way to growth instead of reaping low-hanging fruit by adopting and copying from elsewhere. All this isn’t debatable – there is a ton of economic literature on this, it passes the common sense test, and it is basically a given.

Second, when your starting base is low, fast economic growth is far more necessary to achieve real improvements in living standards and catching up to the West. 5% growth in the US would be remarkable and unprecedented for decades. 5% growth in a country like Egypt, with a GDP per capita of $6,000, will not transform it into a developed or even mostly developed country for the foreseeable future. Not only that, but it will be significantly swallowed up by a population growing at nearly 2%. This is no different from the growth rates in most fiscally healthy developed nations and so in effect virtually no “catch up” happens whatsoever.

This brings us to a second point, the importance of accounting of adjusting for population growth. India’s 8% growth rate in the last decade seems remarkable, prompting talk of “Shining India” and how it is the next big superpower. But considering its very low starting base, and the fact that its population was growing by nearly 2% per year, and you have the far less impressive figure of 6% per capita growth. This is still respectable, but it is barely higher than (much wealthier) Russia, and probably doesn’t warrant the glowing accolades heaped on its “tiger” economy.

At this point, I think it will be a good idea to consolidate all these statistics into a single graph that illustrates the arguments. GDP figures are taken from the World Bank’s 2010 estimates (there is reason to believe China’s GDP is underestimated, hence it has two estimates). GDP growth refers to the mainstream consensus on how fast these countries will be growing in the medium term (e.g. Russia “stagnating” at 4% a year; China following in the historical footsteps of Korea; India growing at the realistically highest rates projected by its proponents; Brazil and Mexico continuing to conform to both their historical rates and medium-term predictions; etc). Population growth is subtracted from the GDP growth to give a per capita figure. The last column are the projected totals for 2020. Figures are rounded off.

2010 GDP /c GDP % gr. Pop % gr. 2020 GDP /c
Brazil $11,000 4% 1% $15,000
China (1) $7,500 8% 0.5% $16,000
China (2) $12,000 7.5% 0.5% $25,000
France $34,000 2% 0.5% $39,000
India $3,600 8.5% 1.5% $7,000
Indonesia $4,400 6.5% 1% $7,500
Korea $29,000 3% 0% $39,000
Mexico $15,000 3% 1% $18,000
Russia $20,000 4% 0% $30,000

The results, as you can see, are fairly stunning. A low population growth and relatively high base – Russia’s GDP per capita of $20,000 is equivalent to that of Poland, Hungary, and Estonia – means that as soon as 2020 Russia will be where Italy is today, with a GDP per capita of $31,500. Now granted Italy may have grown as well, but given its dismal record for the past decade and the growing financial tremors in the Eurozone even this is far from certain. In other words, even at “stagnant” growth rates of 4% per year Russia will have converged to the lower ranks of Western Europe’s rich countries (having overtaken Greece and Portugal outright).

But this isn’t that surprising when you consider that 4% is equivalent to the trend rate at which Korea has grown from 2003, when its GDP reached Russia’s today; the IMF predicts that by 2013, a decade later, it will hit $35,000.

(Excuse the minor digression from the main topic of this post, but the graph also convincingly demonstrates why my Sino Triumphalism is not misplaced. Even under fairly rosy assumptions for India, it will have have barely converged to China’s 2010 level in a decade’s time – and that assuming that China’s GDP isn’t underestimated. The real question isn’t why Russia isn’t growing as fast as China, but why is China growing so damn fast? See other posts for answers).

Now what about unexpected downsides? Objectively, Russia has solid macro fundamentals – far better than the over-indebted, over-leveraged Western economies (with the partial exceptions of Canada and Scandinavia). This is a trait it shares with the other BRIC’s and many other emerging markets in what is truly an amazing and perhaps unprecedented reversal of places in the last decade. This isn’t grounds for complacency – the 2009 recession is argument enough for that.

Nonetheless, the main facts remain intact: (1) It is growing from a relatively high base; (2) In an environment of approximately zero population growth; (3) The strength of state finances preclude any fundamental economic cataclysm as happened/is happening in Ireland, Greece, Latvia, etc. Taking into account these adjustments, a growth rate of 4% is entirely respectable and better than many if not most countries in the same general income bracket.

* Those interested in the details can read here and here.

EDIT: This article has been translated into Russian at Inosmi.Ru (Российская экономическая «стагнация» в глобальной перспективе).

(Republished from Sublime Oblivion by permission of author or representative)
 
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In this third part of my series on national comparisons between Britain, Russia, and the US, I look at the social institutions and infrastructure that play such a big role in our everyday lives. Why is Russia’s life expectancy ten years lower than in the US? What are the most popular university subjects? Where do they live and shop, and how do they get to work? RAFO.

Healthcare

The UK’s National Health Service (NHS) – free at the point of service – is, IMO, the best healthcare system of the three countries. Though waiting lines were a big problem a decade ago, New Labour has thrown a lot of money at them and nowadays lines are much shorter (though the system may well suffer now that the current government wants to “reform” it by cutting staff). Those who can afford it are free to use private healthcare providers or private insurance. The UK spends 8% of GDP on healthcare, and provides objectively better healthcare outcomes than the US system which occupies 16% of its GDP.

That said, the American system is better at some things: its medical technologies are the most advanced in the world and its hospitals are better equipped, and if you can pay for it – or if your insurance covers it – then you chances of surviving many forms of degenerative diseases are substantially higher than if you’re treated by the NHS. Also, emergency service is free; even if you’re an undocumented immigrant and have a heart attack, you will be treated at the EM ward and get that triple bypass. However, if you’re suffering from a wasting disease and aren’t insured, you are screwed. Also very problematic are minor, but painful and very inconvenient problems, such as a chipped tooth. What you can fix in Russia for a $50 fee, or get for free after several weeks of waiting from the NHS, may set you back by a cool $500 in the US.

PS. Speaking of dentistry… the Brits have a reputation for very bad teeth. But this is an outdated stereotype.

In Russia, compulsory medical insurance is paid out by companies, while treatment for indigents is provided by the state. However, with spending on healthcare a meager 4% of GDP, and many facilities in lack of repair and staffed by poorly trained specialists, treatment of chronic diseases in Russia remains fairly primitive in comparison with the US or the UK. It is wise to pay a “gift” to the nurses to ensure that you or someone you care about gets good treatment during your hospital stay; though it’s their job, their salaries are still very low, and such things are appreciated. This also applies to doctors. Call it corruption, call it a legacy of communism, or call it social support for healthcare workers, but it’s expected – especially from richer people – and refraining from it can make your stay a more unpleasant and dangerous one.

Life expectancy, at 69 years, is far lower than the 78 years in the US or the 80 years in the UK, but it is primarily not because of poor healthcare – Ingushetia, one of Russia’s poorest regions, but a “dry” Muslim republic, has a life expectancy of 78 years – but because of the alcohol and smoking epidemic (see below). The lowest life expectancies are in particularly run-down regions, especially those with big non-Russian (and non-Muslim!) minorities, as well as Siberia and the Far East; the highest life expectancies are in the Muslim Caucasus, the southern regions, and Moscow. In the UK, life expectancy is highest in the south, especially around London; and lowest in Glasgow at 73 years (not surprisingly, Glaswegians are also the most alcohol prone in the UK). In the US, the highest life expectancies are on the east coast and the west coast (including California), at around 81 years; the lowest, at 75 years, are in the South, the epicenter of America’s obesity crisis.

After a great deal of investment in recent years, the infant mortality rate has fallen to 7 / 1000 live births in Russia, which is the same as in the US, but higher than the UK’s 5 / 1000. To deal with the post-Soviet fertility crisis – the number of expected births per Russian woman dropped from a replacement level rate of 1.9-2.1 during the 1980′s to a nadir of 1.12 in 2000 – the government implemented pro-natality measures in 2007 that gave each woman a $10,000 payment for a second child. Since then, the fertility rate rose from 1.3 children per woman in the mid-2000′s, to 1.6 by 2010.

The UK’s fertility rate was 1.9 and the US fertility rate was 2.1 in 2008. Generally speaking, families of two children are the norm in both countries, while families with three or four children are also fairly common; in contrast, while the vast majority of Russian woman do have children, the typical family size is one or two children, with more being rare outside the Muslim Caucasus (where the fertility rate is about 2 children per woman). There are significant regional differences in all these countries. In the US, fertility rates are lowest in the highly urban North East, followed by the West Coast and industrial Mid-West; they are highest in the South and central states; Utah, with its Mormon population, is a very high outlier. In Russia, fertility rates are higher in rural areas, and to the east of the country, and amongst some traditionally Buddhist peoples of Siberia and in the Muslim south; the biggest single outlier is Chechnya.

Similar scenes are common throughout Russia.

Similar scenes are common throughout Russia.

Russia’s alcohol epidemic has no parallels outside the former Soviet Union (Belarus, Ukraine, and the Baltic states suffer from similar problems), and is the main reason why its life expectancy lags nearly a decade behind the US and the UK. According to research, something like 25% of Russian deaths, both directly and indirectly, are caused by alcohol consumption. It is not unusual for the heavy drinkers to retreat to a multi-day vodka binge with like-minded friends, called a zapoi, and then go back to work and stay dry for a few weeks or months on end; and this occurs amongst men of all ages.

This excess mortality is especially concentrated amongst middle-aged men. Among young people, beer is displacing vodka, lessing the disparity relative to the US and Britain in recent years; while among old people, death rates begin to converge with Western ones, largely because any old Russians are typically those who rarely or never binged on hard spirits in the first place.

While Britain also has something of a binge drinking problem, it does not cause major health impacts on the population as a whole because most of it happens just one night a week, amongst people in their late teens and twenties with robust constitutions.

Many rural Russians even brew their own moonshine (samogon) – a relic of Gorbachev’s failed attempts at prohibition – which can be surprisingly good and sometimes even better than the bottled stuff. It’s certainly much better than DIY booze. Once upon a time when the vodka ended, our host didn’t want to end the party / binge, and mixed up a brew of medical spirit with water and slices of lemon. By that point we were probably too drunk to notice and certainly too drunk to care. The morning after consequences were unpleasant to say the least.

Alcohol prices are very low in Russia*. Last time I checked, you could buy a bottle of vodka for $3, and a two liter plastic bottle of beer for less than $2. In contrast, a bottle of vodka costs $15-20 in the US and a six-pack of beer is perhaps $8. However, wine can be pretty cheap. While good stuff costs $15+, the cheapest bottles can be had for $3, while a five liter Franzia pack costs $12.

* However, those days are coming to an end. Taxes on hard spirits are to be quadrupled through to 2015.

Smoking is far more popular in Russia than in the UK or the US. Only 20-25% of people smoke in the US and the UK; in fact, smokers are widely considered to be losers. In contrast, upwards of 60% of Russian men and about 30% of Russian women smoke. The share of the smoking population peaked from the early 1990′s (when the Russian tobacco market was liberalized) to the mid-2000′s. They have now started falling under the pressure of a state propaganda campaign against smoking (anti-smoking initiatives were began in the West almost three decades ago) and rising tobacco taxes. Nonetheless, cigarettes remain very cheap. Whereas a pack costs $5-8 in the US and the UK, you could buy one for just $1 in Russia as late as 2008. But as with vodka, the days of cheap cigarettes are now numbered.

Education

The uniforms at Lancaster Royal Grammar School.

The uniforms at Lancaster Royal Grammar School.

Mandatory schooling in the UK consists of primary school for 6 years and secondary school for another 5. After that, many students go on to do three to five “A-Levels” in their chosen subjects for another 2 years and apply to university through UCAS. In total, about 40% of the population goes into higher education. It used to be highly subsidized by the government, but tuition fees were raised to £3,000 per year in the mid-2000′s and will be raised further to £6,000-9,000 from 2012 (in practice, all self-respecting universities will charge the highest rates, since failing to do so would signal lack of confidence in their own quality). These fees may be covered with a direct loan from the Student Loans Company, but will effectively act as a burdensome tax until they are paid off. IMO, it would behove the average British student to study at European universities, most of which are free or charge only symbolic rates. Typical UK programs offer a single program of study (e.g. Math; Fine Arts) for three years and are geared towards corporate applications.

Cambridge is the top ranked UK university, closely followed by Oxford. The two are called Oxbridge.

Cambridge is the top ranked UK university, closely followed by Oxford. The two are called Oxbridge.

There are 12 grades of US mandatory schooling, divided into: elementary, secondary, and senior high. In the latter, students work on the SAT’s and ACT’s that are required for university admission. The SAT’s are pretty basic, and mandatory; but other qualifications such as A-Levels or International Baccalaureates are accepted in lieu of ACT’s. About 70% of the US populations ends up with some kind of college education and there are far more mature or returning students than in the UK. In private universities, fees are high, but subsidies for poor families and scholarships are very generous. Ironically, public universities are actually less affordable for lower middle class families (though poor families get state aid). Any remaining lack of money can be made up with state subsidized loans. Finally, fees are very low in America’s excellent system of community colleges. The claims that most Americans can’t afford university are untrue; in fact, the US rate of tertiary enrollment is higher than in most European countries, which rations by limiting the numbers of available places.

Apart from the occasional truant, secondary schooling is universal in all three countries. All British pupils wear school uniforms, but it is infrequent in Russia, and very rare in the US.

Corporal punishment is still practiced in schools in the conservative states in the US, which is shocking to many Europeans. Russia abolished corporal punishment in schools in 1917. The UK abolished the practice in 1987, and extended it to private schools by the early 2000′s (under EU pressure); before that, the headmaster’s cane was a common cultural element amongst the boarding school graduates that formed the British upper middle class. E.g. see Roald Dahl on the matter.

Home schooling is legal in all three countries, but is by far the most widespread in the US. If I had to guess, it’s because of its large population of fundamentalists who don’t want their children to be exposed to the theory of evolution or sex education.

All three countries are fairly conservative (by mainland European standards) on sex education. In the US, the focus is on propagandizing abstinence only, which doesn’t seem to work if teenage pregnancy rates are anything to go by. Sex education remains highly controversial in modern Russia, but is no longer the taboo it was in the USSR. In the UK, most sex education focuses on the reproductive system, with coverage of contraceptive methods typically limited to a single class. Most mainland European states seem more progressive; a German acquaintance told me one of the sex ed assignments was to buy a condom and bring it to class.

U.C. Berkeley is the top ranked public university in the US. It has a lively protest culture. I took this photo at a demonstration against funding cuts.

U.C. Berkeley is the top ranked public university in the US. It has a lively protest culture. I took this photo at a demonstration against funding cuts.

The curriculum in US universities is far broader than in Britain. In contrast to the latter’s hyper-specialization, Americans place a particular stress on the value of a well-rounded “liberal arts” education; in addition to a chosen major, students are encouraged and frequently required to take classes in history, math, literature, etc. So despite the typical US undergrad degree lasting four years as opposed to the British three, the average American student only spends perhaps 2-3 years on her major; on the upside, she emerges more knowledgeable on the world in general. The US doesn’t have rigidly structured programs for particular subjects, as with Britain; as long as the requisite units have been taken by the end of the four years, the student gets his degree. To take U.C. Berkeley as an example, you need 120+ units to graduate; each class is worth three to five units; and you typically take about four classes per Fall and Spring semester (and perhaps one or two classes during Summer).

Mandatory schooling in Russia lasts for 10 years, and consists of 11 grades (the 4th grade is bizarrely missing). Traditionally, universities admissions were based on school grades, and in the case of elite universities, written and oral exams in the proposed field of study. Recently, this system has been replaced by the Unified State Exam, which is to be taken by every school leaver and used in all university admission applications. The idea is to make the process fairer and more transparent. About 70% of Russians go into a Higher Education Institute (VUZ), which can be a university, academy, or specialized school. The typical undergrad program at a university lasts four years, follows by a two year Masters. Students take classes from different departments in the first period, and spend an increasing proportion of time on their chosen subject later on. University fees are AFAIK much lower than in the US or the UK, but state stipends for students are miserly; there is intense competition for the limited fully subsidized places.

Many poorer American students take part-time jobs to fund their university study; many others work to begin building their career (e.g. it is common for both US and UK students to intern at investment banks, IT companies, etc. during summer). Fewer young people work in Russia; university study is more typically expected to be a full-time job. However, its system of distance learning and evening classes is arguably far more developed – a legacy of the Soviet focus on expanding economic opportunities to ordinary workers, e.g. a Volga fisherman doing problems on math and engineering sent to him from an educational institute, in preparation for transferal into the oil industry.

Most universities in the US tend to be private, albeit there are some excellent public schools too. In Britain and Russia, almost all universities are public. I don’t really see the need for most UK universities to remain under state control; with the recent reforms, they will get very little funding from the state anyway, so why continue bothering with their red tape and regulations?

The marking systems differ. In British schools, everyday school grades are numerical, with a 1 being best and a 5 being worst; however, in national exams, an alphabetical scale is used (A* is best in GCSE’s, and recently in A-Levels too; a C is a pass, while anything lower is a fail). In Russia, the order is reversed, with a 5 being best (pupils who consistently get these are called otlichniki, lit. “outstanders”; proudly by their parents, and disparagingly by their classmates) and a 2 being worst (pupils who specialize in these are called dvoichniki, lit. “two-ers”). In the US, an A is the best grade, a C is a pass, and an F is a fail. The marks for different subjects are computed into a Grade Point Average (GPA), with an A counting as a 4.0; an A- as a 3.7; a B+ as a 3.3; a B as a 3.0; a C as a 2.0; etc. To get into a good British university, you’ll need mostly A’s, with a few B’s; to get into a good American university, you need a GPA higher than 3.5 and a good extra-curricular record.

In US universities, having a GPA of less than 2.0 is regarded as a fail, and grounds for expelling a student unless he improves. Having a GPA above 3.3 is very much recommended from a future employment perspective; to get into decent graduate schools, law schools and medical schools, a GPA of 3.7-4.0 is expected. In British universities, the undergraduate degree classification goes, from best to worst: 1st, 2:1, 2:2, 3rd, pass, fail. Those with a first-class or upper second degree enjoy the best job prospects. During the Soviet period, graduation certificates were either Red (theoretically better) or Blue (theoretically worse), but in practice few paid attention to them because it was possible and even typical for geniuses to get Blues because they did badly on their obligatory and ideologized (Marxist-Leninist) political economy exams. I don’t know how degrees are classified in today’s Russia.

There has been a lot of grade inflation in the US and the UK in recent years. This is especially visible at private, prestigious US universities like Yale: it is hard to get anything less than a B (equivalent to a C at public institutions). After all, why would parents pay over the roof for their children to end up with crap grades? The same processes can be observed in the British national exams, GCSE’s and A-Levels, to the extent that top-tier universities are now creating their own entrance exams because it is hard to separate the top flyers from the merely competent.

Economics and related disciplines (Business, Management, Marketing, etc.) have become the most popular subjects in Britain, Russia, and the US. With the exception of Applied Math* and Computer Science – useful for finance and IT, the two most dynamic, high-paid and prestigious sectors in all three countries – the hard sciences (e.g. Physics, Chemistry, Engineering) are withering away, though the extent of the degradation varies (most advanced in Britain, least advanced in Russia). Though there is concern about this process in all three countries, I view this as a natural consequence of post-industrial development. Other disciplines that have grown in popularity include History, Legal Studies, and Political Science. There has also appeared a plethora of degrees in Media Studies, Women’s Studies, etc., in all three countries; they are popularly dismissed as “fluff” or “doss” subjects, and certainly offer substandard employment prospects.

* For whatever reason, it is “math” in American English and “math s” in British English.

The process of becoming a doctor or lawyer varies by country. In the US, universities rarely offer classes in medicine. Instead, “pre-meds” are required to take a number of classes in fundamental sciences (Biology, Chemistry, Biochemistry, Physics, Math) while doing any degree they wish (though in practice most pick something like biochemistry). The aspiring lawyer tends to take classes in subjects like Legal Studies, History, and Political Science. There is intensive competition for places at law and medical schools, so only those with the highest GPA’s, and the best MCAT’s (Medical College Admissions Test) and LSAT’s (Law School Admissions Test), get in. After several more years of study, and apprentice work at a hospital or law firm, a new doctor or lawyer appears in America.

In Britain, both Medicine and Law are studied as subjects at university for three years. As I understand it, the apprenticeship with a hospital or law firm follows immediately afterwards. On average, US doctors seem to be better trained than British ones; at least, whereas an American doctor would have no problem establishing himself in the UK, the reverse does not apply (not to even mention a Russian doctor).

Which country has the best education system? The results of international standardized tests show that there is little difference between the three countries. Russia does slightly worse on the PISA tests than the US, and the US does significantly worse than Britain; on the other hand, Russia tends to do slightly better on the TIMMS and PIRLS tests. So it’s hard to say. If I had to make a generalization, I’d say math and hard sciences are taught better in Russian schools, whereas the British and Americans are better at developing argumentative and essay writing skills.

In writing and literature, Russian schools are more into rote learning and learning by repetition, as opposed to analysis and evaluation. (Whereas Americans and Britons undoubtedly write better essays, Russians quote their national writers and poets nonstop; even I can still recall some of Aleksandr Pushkin’s poems that had been drilled into me at an early age, and my grandma seems to know the entire Russian literary canon by heart.)

Moscow State University is usually the top ranked Russian university.

Moscow State University is usually the top ranked Russian university.

The situation is clearer in higher education. According to the most famous ARWU global universities rankings, Russia has just 2 institutions in the Top 500, compared with 154 for the United States and 38 for the United Kingdom. However, it’s important to stress that these rankings aren’t primarily reflections of universities’ quality of education, but of their funding and international prestige. The scientific programs at Moscow State, MIPT (host to several Nobel Prize winners, but not even on ARWU’s lists), and the top 10 or so Chinese institutions for that matter are easily as rigorous as MIT or Cambridge. It is ridiculous to say, relying on ARWU, that education is better at the University of Lancaster or the University of Reading – decidedly middling UK institutions – than the University of St.-Petersburg, Russia (which produced the researcher who would make what is probably the biggest mathematical achievement of the past decade). The Times Higher Education ratings are even more overtly biased in favor of Anglo-Saxon institutions.

These rankings should all be more properly considered as global university reputation rankings. In many parts of the world, the simple ownership of a university degree from the US or the UK – no matter the subject, no matter even the performance – confers a great deal of respect and lucrative job offers. That is why Gadaffi’s son paid a $1.5 million “donation” for his London School of Economics degree and some Chinese pay as much as $20,000 for degrees from fake Californian universities. It is common for oil rich countries like Oman or the UAE to pay for their well-connected citizens to get papers from some middling British university and present them with a secure administrative job on their return. Dependent on this money, lower-ranking UK universities practically never fail these students, no matter how little they study. Russia’s attitude to Western degrees isn’t quite as absurd as that of the Arabs; nonetheless, when choosing between a Moscow State graduate and an equivalent LSE graduate, the Russian employer will typically give the job to the British-educated applicant.

While judging these things is hard, I would say that the level of theoretical knowledge gained by students at Russian universities is no worse than at equivalent British or American universities; possibly, even better (note that the standard Russian undergraduate degree lasts six years, as opposed to four in the US and three in the UK). However, Russian universities fail big-time when it comes to applying their research capabilities to corporate applications. This is in stark contrast to the US, where venture capitalists scour universities for the next big start-up, big corporations sponsor and head-hunt for talented students, and professors and departments strike up partnerships to develop innovative new products and services. The same process goes on at British universities, if at a more subdued pace.

Russian universities are the successors to the Soviet system of higher education, whose biggest strengths were in math and theoretical physics, while the main applications were in military R&D. This made research hard to monetize in civilian markets in the context of the new market economy. But far more critical than these Soviet distortions was the state’s neglect of the academic sector throughout the 1990′s-early 2000′s. Scientific equipment has not been modernized, with the result that only a few top universities are still capable of conducting world-class research in spheres such as applied physics or microelectronics. Still more damagingly, many of the most brilliant, younger, and entrepreneurial people left Russian academia for the much bigger salaries of business or foreign academia. The result is that even in distinguished institutions, it is not uncommon to see professors in their 70′s continuing to teach subjects like math – not so much for the salary as love of their work – which is inspiring, but also very ineffective.

Now while it is true that some universities have begun to prosper and strike up corporate partnerships, e.g. Moscow State University with Yandex (Russia’s Google), this remains the exception rather than the rule. Academic salaries have risen massively in the past few years and continue increasing, but are still not competitive enough to draw back the academics lost to the 1990′s “brain drain” (see The Russian Diaspora in the second part of this series) or, more importantly, to retain the best current graduates. Until Russian academia is modernized and acquires a more commercial focus, it will not be able to play a major role in the development of Russia’s market economy.

Cheating is most prevalent at Russian universities, followed by American ones, and then British ones. In the former, it is not unheard of (though far from typical) to pay instructors for a passing grade. In the US, direct payments to instructors don’t pass muster (as in the UK) – nobody is going to risk their $60,000-$150,000 salary, secure job, and professional reputation by taking bribes. Cheating there is done more discretely, e.g. by paying professional essay writing companies for college essays (read here for a interesting account from one “shadow scholar”). These companies, BTW, are completely legal by dint of the First Amendment; though they all take care to stress that their essays are for purely educational persons, and shouldn’t be used for cheating, everybody understands that this is just the fine print.

More frequently, students simply plagiarize from the Internet. My impression is that it is endemic in all countries, and is only discouraged by a high rate of discovery and severe punishments. To this end, special programs have been developed to compare student essays and exams with comparable content on the Internet. I don’t know about the situation in Russia, but punishments tend to be severe for students caught plagiarizing in British and American universities.

Overall, university admissions are probably the most meritocratic in the UK. In Russia, though the system is supposed to be meritocratic, it is skewed by corruption, for it is not unknown for applicants to bribe admissions staff at the more prestigious universities, and certainly the children of oligarchs or powerful politicians – no matter their intellectual aptitude – experience few problems in getting into schools like Moscow State University or MGIMO. However, direct bribes have become more difficult in recent years, due to the national standardization of the exam system. The US is in between. Though direct corruption is as unheard of as in the UK, the system itself is rigged in favor of the rich and influential. The most egregious example of this is the open discrimination in favor of legacies, the children of former alumni of the university. The more your parents “donate” to the alma mater, the better their children’s chances of getting in. This reminds me of a Simpsons episode where the nuclear power tycoon Mr. Burns takes out his checkbook to negotiate a place in Harvard for his ne’er-do-well son Larry.

Man: Well, frankly, test scores like Larry’s would call for a very generous contribution. For example, a score of 400 would require a donation of new football uniforms, 300, a new dormitory, and in Larry’s case, we would need an international airport.

Woman: Yale could use an international airport, Mr. Burns.

Burns: Are you mad? I’m not made of airports!

This would be considered pretty repellent by Europeans (and most Americans too), but is only counted as corruption by the former. There are two other major examples of discrimination in university admissions to US colleges. First, good athletes – primarily American football players, rowers, and lacrosse players – are much more likely to get in with poor grades, as they bring their university money and recognition (this is also common in Oxbridge, UK, for rowers). Second, there is positive discrimination* based on race: due to their poorer academic performance in schools, African-Americans** and Hispanics have an easier time getting in on poor grades than whites or Asians. (Jews have a great time of it. Though they have the highest grades of any ethnicity, they are counted as whites for the purpose of university admissions.)

* This is not necessarily a bad idea. First, a higher education is absolutely necessary for all but the lowest-skilled careers in the US, and to enter the ranks of the elites (this is also the case in the UK and Russia). It’s in the interests of the American state – if not of ethnic Asians, who are disadvantaged by the system – that all races are adequately represented in higher education. Second, positive discrimination – in theory – is supposed to make up for the supposed discrimination that African-Americans and Hispanics suffer in schools (otherwise, why would their SATS scores be so much lower than the national average?). Abandoning it may be viewed as a politically incorrect admission that the reason their scores are lower isn’t because of systemic racial discrimination, but because of something else. The uber-controversial issue of race and IQ rears its head. So, curiously, despite its more right-wing stance on most social and economic matters, at least in this respect cultural Marxism goes deeper in the US than in Europe (including Russia and the UK).

** This translates to being black. Amusing anecdote: several years ago, a bunch of white South African students who are now American citizens applied for an academic prize for “African-Americans”. The awarding committee was not amused.

The most prestigious US universities belong to the Ivy League: Brown, Columbia, Cornell, Dartmouth College, Harvard, Princeton, Pennsylvania, and Yale. In particular, Yale University is known as a fostering ground for future Presidents. Other excellent universities, with lower social profiles, include Stanford, U.C. Berkeley, Chicago, and Carnegie Mellon. Academically, the foremost US universities include Harvard, Princeton, MIT, Caltech, Stanford, U.C. Berkeley, and Yale. The British elites go to Oxford (if they’re bright) or St.-Andrews (if they’re not as bright, e.g. heir to the throne Prince William). Cambridge is probably the most academically rigorous – certainly for the sciences, anyway – followed by Oxford, Imperial College, University College London (UCL), the London School of Economics (LSE). The most prestigious Russian institutes are Moscow State University; the Moscow State Institute for International Relations (MGIMO), which trains Russia’s diplomats; St.-Petersburg State University; and the Higher School of Economics (HSE) in Moscow.

Fake colleges and degrees are common in both Russia and the US. In the latter, they are mostly in fun sunny places like California and Hawaii.

Sport

Most Americans, Britons, and Russians don’t do sport regularly. None of these countries has the kind of mass fitness culture or “body culture” seen in Germanic and Scandinavian countries.

The kettlebell swing.

The kettlebell swing.

In Russia, the main divisions are seasonal: ice hockey in winter; football in summer. In Russia, kettlebells (girya) are a common site in gyms, whereas they are virtually unknown in Britain and the US. This is a shame since they are extremely effective at developing overall body strength.

In Britain, the lower classes play football and the upper classes play rugby and cricket (contender for most boring sport in the world).

In the US, basketball, American football, and lacrosse are the big sports; California is special in that skiing and surfing (IMO two of the world’s coolest sports, along with shooting) are both possible and very popular. The US is remarkable in the breadth and diversity of its sporting culture – you can find amateurs in practically anything.

The Russians are world leaders at chess, with plenty of very strong players. The British are also pretty good at it. Far fewer Americans know how to play it, and even state tournaments in the US are about as competitive as county tournaments in the UK or oblast tournaments in Russia (which have far fewer people). Of the world’s top 100 players, fully a quarter are Russian; three are English; and three are Americans – but of those, two have Russian names, and one has a Japanese name.

In the US, even dogs play poker.

In the US, even dogs play poker.

Just as many Russians will play chess or checkers, or the card game of durak (lit., “fool”), to pass away the time, Americans like to gather in groups of three or more to gamble in poker. Of course, gambling isn’t really the right term for poker, since the player with more skills will always win in the long-term. The popularity of poker has grown tremendously in recent years, with mathematicians getting involved in figuring out optimum play.

Thanks to its Asian population, the fascinating game of go, or weiqi, is also far better known in the US than in Russia or the UK. It is far more complex than chess; whereas in the latter the pieces can only move in certain ways around an 8×8 board, in go you can place stones on any unoccupied territory on a 19×19 board in an effort to encircle and capture your enemy’s stones. Whereas there are computer programs that can play chess at grandmaster level, none have yet been developed for go.

If checkers correspond to the linear warfare of (early) WW1, and chess to the mechanized combined-arms warfare of WW2, then go is the face of future war.

Housing

The ideal middle-class settlement for both British and Americans is suburbia. In theory, it combines city amenities with rural idyll; the critics aver that it is better at combining city pollution (noise, gas fumes, etc) with rural isolation. There are some excellent Amerian cities (e.g. San Francisco; Seattle; Austin), but many others are uncontrolled suburban sprawls (e.g. Los Angeles) or post-industrial shells beset by so-called inner city blight featuring ethnic ghettos and high crime rates (e.g. Detroit; Baltimore).

A typical Russian cityscape.

A typical Russian cityscape.

Most Russians live in apartments, in flats of varied age and construction quality. The Russians have a stricter division between high-density cities and low-density countryside, with a c. 100km band separating the two with a lot of intensive agriculture and dacha settlements (houses with plots of land) where Russians go during the weekends or holidays to tend to their vegetable gardens, pick mushrooms, etc. About half of Muscovites have a dacha, and they range from simple huts to luxurious mansions not very aptly called “cottages” (kotedzhi).

In all three countries – in contrast to central Europe, where renting is prevalent – most people own their own houses or apartments. Both the US and the UK place ideological stress on the virtues of private home ownership (extending mortgages to people of questionable creditworthiness was one of the key reasons of the 2008 financial crisis), while most Russians simply privatized their homes off the state during the 1990′s.

Housing prices have soared in Russia over the past decade to a far greater extent than in the US and Britain, but have fallen after the 2008 crisis; nonetheless, on average prices remain far below British and American levels. A typical, two-bedroom apartment in one of Moscow’s suburbs, not far from a Metro station, may cost $250,000; this will only buy you a semi-detached house in a middling British town, whereas an equivalent apartment in a London suburb will probably be closer to $1,000,000. In Moscow oblast, more than 100km from the city, a detached house with a big plot of land costs no more than $150,000; in the Russian regions, two-bedroom apartments are typically well below $100,000. In the US, as with Russia and the UK, there are great geographic disparities. Where space availability isn’t an issue, e.g. Texas, it is fully possible to buy fully detached houses with big plots of land for not more than $200,000; whereas in the Bay Area, excluding the ghetto areas, even a modest studio could set you back by up to $500,000.

PS. One more note on relative prices. In recent years, the media has made a lot of Moscow becoming the world’s “most expensive” city. It probably is… if you’re an expat addicted to five star hotels, top-class escorts, and champagne lounges. For ordinary people, who don’t live in Moscow’s center or its airports, living costs are still far cheaper.

America is the quintessential land of skyscapers; any city that is anywhere will have a few, to make up its financial district, while those in major cities such as New York, Chicago and San Francisco are world famous. They used to be practically non-existent in the USSR, except for the “seven sisters” Stalinist-era showpieces in Moscow. During the 2000′s, however, skyscraper construction has taken off, and most of the largest Russia cities now boast a few skyscrapers. During the euphoria of 2007-08, construction began on Russia Tower, which was to be at 600m the tallest skyscraper in Europe; however, financing for it collapsed after the 2008 economic crisis, and it remains in limbo to this day. In Britain, there are few skyscrapers. Most are of modest height and concentrated in The City (London’s financial district), including the infamous Gherkin.

Transportation

A typical Russian city road.

A typical Russian city road.

British roads are good (though not as good as German ones), US roads are mediocre, and Russian roads are crap. Beyond Moscow’s ring road, many roads become potholed; further afield, e.g. the single road tying the Far East of the country to the center, it is little more than a dirt track that turns into impenetrable mud during the rasputitsa, or rainy season.

Part of the reason is that the country is vast, and that central planning with its penchant for railways didn’t care much for good roads or automobile ownership; another reason is that the road construction industry is, quite possibly, the most corrupt sector of the Russian economy (which is no mean achievement). The dismissed Mayor of Moscow, Yuri Luzhkov, is suspected of organizing kickbacks totaling billions of dollars to well-connected road construction companies in the Moscow region alone. Now there’s quite a bit of corruption in road construction in the US too – for instance, Massachusetts somehow managed to spend $15 billion on basically a couple of substandard tunnels in the Big Dig – but in Russia it seems to be the rule rather than the exception.

The vast majority of cars in the US are stick-shift, while a similarly vast majority of cars in Europe, including Russia and Britain, are manual-transmission. Petrol costs the same in both Russia and the US, and is about three times as expensive in Britain. Some cars in Russia run on natural gas.

Russian railways, on the other hand, are far better than their roads. They don’t offer amenities like free Wi-Fi, as British trains now do, but they make up for it in vastly lower costs. The price of a ticket from Manchester to London can approach £80. When I traveled from Moscow to St.-Petersburg in 2003, it was 500 rubles, or about $15 (granted it was on the lowest-class, because I was a cheapskate, but even getting a good class cabin for the overnight journey would have been well under British rates). As for US passenger railways, the less said the better. IIRC, it costs about $20 to go from San Francisco to San Jose, there’s no Internet, and after that the line ends.

Komsomolskaya Station, not the type of Metro station one would expect.

Komsomolskaya Station, not the type of Metro station one would expect.

The Moscow Metro carries up to 9 million passengers a day, and despite price rises, remains cheap. In contrast to the drab, utilitarian nature of most metro stations elsewhere, its central stations are truly “palaces of the people”, featuring murals, mosaics, statues and monuments, etc. A single journey costs a bit less than $1, while buying multiple journeys decreases the average price. Students and pensioners get to ride free. In the Soviet Union and early 1990′s, men would typically give up their seats to women, but this ended sometime by 1996. A victory for feminism? Or a collapse of moral standards? You decide.

Interesting factoid #1: Packs of stray dogs have become intelligent enough to navigate Moscow’s subways. You can sometimes see them lying or sleeping on the train benches. Read more here.

Interesting factoid #2: Russia’s most famous post-apocalyptic novel of recent times, Metro 2033 by Dmitry Glukhovsky, is set in the Moscow Metro, where subterranean human civilization ekes our a miserable survival while nuclear radiation and mutants ravage the world above.

Most other big Russian cities also have metros, as do the biggest UK cities and most big cities in the eastern US. Mass transit is very poorly developed on the West Coast. Los Angeles is a giant car sink, with legendary traffic jams. San Francisco and the Bay Area have the BART system, but it’s not a pleasant riding experience and pretty expensive besides; plus, the train seats are full of germs and shit. Yes, shit, like for real: “Fecal and skin-borne bacteria resistant to antibiotics were found in a seat on a train headed from Daly City to Dublin/Pleasanton. Further testing on the skin-borne bacteria showed characteristics of methicillin-resistant staphylococcus aureus, or MRSA, the drug-resistant bacterium that causes potentially lethal infections…” Makes one wish for the cold, hard comfort of the wooden benches of an elektrichka.

Tramways used to be a major part of the urban transportation landscape in Russia, but their significance has decreased since the 1990′s; however, they still remain a prominent feature of the transportation system in some cities, including St.-Petersburg. They are no longer an important transportation mode in either the US or Britain.

Los Angeles, the epitome of suburban sprawl and poor city planning.

Los Angeles, the epitome of suburban sprawl and poor city planning.

Cars aren’t only at the center of US transport, but its life in general; if you live in suburbia or rural areas, you can’t get by without them. Big strip malls like Target, Walmart, Costco, etc., dot suburbia and serve the customers within a ten mile radius or so, having largely displaced local shops. The same process is ongoing in Britain, with a ten year lag. In Russia, car ownership is much lower than in the UK or the US; partly because of lower incomes, but also because they just aren’t as necessary, seeing as its cities are higher density and have cheap and adequate public transportation options (rail, metros, trams, buses). That said, Moscow’s traffic jams have become infamous in recent years, and nowadays only idiots – of whom there are a lot – commute to work by car there.

The US only seems capable of producing gas-guzzling SUV’s well, with the result that its automative sector collapses during oil spikes. Increasing fuel economy standards is a political hot potato, with Republicans set against it even though the US lags behind pretty much every country in the world in this respect (including China). The UK’s domestic brands have all collapsed, so the only cars there are foreign imports or produced by foreign-owned factories on its soil. It is not uncommon for Britons to buy their cars in Europe because of the high prices of cars sold in the UK. In Russia, the huge Avtovaz factory that produces the sturdy Lada (based off a 1970′s Italian design) just about survives with help from government subsidies and high tariffs on imported cars. Nonetheless, it doesn’t have a bright future, since most Russians would prefer to buy a second hand Audi or Toyota than a new Lada, even if the former costs a bit more. Whereas a decade ago most cars on the road were of visibly boxy Russian make, today’s (much bigger) car fleet seems to be more than 50% foreign; of the foreign makes, about half are imported and another half are manufactured by foreign-owned factories in Russia. A high proportion, e.g. about 50%, of vehicles on US roads are SUV’s; this percentage is closer to 10% in the UK and Russia. In France and Germany, SUV’s are very rare.

Flying is extremely prevalent in the US; it is frequently more profitable (and certainly faster) to take a flight from San Francisco to, say, Las Vegas or Los Angeles, than to make the journey by car (the only other valid transportation option). A typical round-trip starts from around $150. In Britain, to go from Manchester to London costs less by train than by plane, but not by much; many opt for the plane. Flights to Europe are cheap and very competitive; not infrequently, budget airlines like Ryanair offer amazingly good deals at prices like $50 for a round-trip to Prague, Munich or Barcelona and back. As for Russia, the days when you got on rickety Soviet-era planes with a shot of vodka for courage are over; most airlines have modernized their fleets. Air fares are competitively priced – the farthest off cities will cost about $500 for a round trip (e.g. Vladivostok), but common routes like Moscow to St.-Petersburg are around $100, and go even lower on the cheapest no-frills airlines.

Shopping

Most shopping in the US and Britain – and increasingly, Russia – occurs in retail stores of varying size specializing in food, electronics, alcohol, cell phones, clothes, etc. These differ from high-end venues specializing in quality and fashion (e.g. Topshop) to mass consumer venues (e.g. Safeway, Tesco, ASDA, Walmart, IKEA) to those catering for lower-income people (e.g. Costco, Aldi); they are standardized, and it is often hard to tell the different between these shops be they in the US, Britain, or Russia. There are also plenty of ethnic stores (e.g. Chinese shops in the US, or Armenian shops in Moscow); they tend to sell interesting foods and wares that are rare elsewhere, but also tend to be more congested and less hygienic.

Online shopping is most advanced in the US, which has generated giants like Amazon and eBay. It is also prevalent in Britain, but much less so in Russia (though it is growing very fast).

The Cherkizovsky Market, Moscow's largest bazaar, recently closed.

The Cherkizovsky Market, Moscow’s largest bazaar, recently closed.

The outdoor market, or bazaar, is a prominent feature of Russian life. Located near railway stations and protected by private security, all kinds of vegetables, fruit, pickles, meat, fish, clothes, pirated video games – and even less legal things in their darker corners – are sold here. Food products are typically cheaper than in normal shops, and despite criticism over sanitary conditions, they are often fresher too.

These markets are typically dominated by migrants, though ethnic Russians are also prevalent. They will pay to set up a stall and hawk their goods to passers by. Haggling over prices is usual and expected. They are highly congested and thrum with the beat of commercial life. There are no effective formal controls over cheating – e.g. weighting vegetables incorrectly on purpose so as to extract a higher price – but is rare due to the potential reputational risk of doing so. With rising incomes and a decreasingly tolerant outlook by the authorities, due to the markets’ association with crime and illegal immigration, the prominence of these huge bazaars has fallen in recent years; nonetheless, they remain a favorite shopping place for the poor, pensioners, and even lovers of fresh fruit and vegetables (though buying meat or fish from them is less advisable). Such markets are much rarer in Britain or the US; in fact, most of them are temporary, only springing up on a certain day of the week.

Electronics are cheaper by about 30-50% in the US than in both Russia and the UK. I presume that is because the latter have higher tariffs? Books are far cheaper in Russia; typically, modern novels cost $5. In the US, they are usually $10, and £10 in the UK.

The luxury shopping mecca in Britain is Harrods, owned by controversial billionaire Mohammed Al-Fayed. Its equivalent in Russia is the GUM.

The US undoubtedly has the best cafes. Free WiFi (after buying a drink) is usual, even expected. This is much rarer in Britain, while Russia doesn’t even have a cafe culture as such*.

* Of course, Russia’s changing rapidly, and this might no longer be the case. I was last there in 2008, and for a substantial period of time in 2005, so much of what I say about it is already outdated. This is a point I emphasize throughout this series.

(Republished from Sublime Oblivion by permission of author or representative)
 
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In the wake of the economic crisis in which Russia’s GDP fell by a stunning 7.9% in 2009, its status as a BRIC economy – with its connotations of promise and progress – was brought into question. After all, isn’t it a dying nation with rapidly degrading infrastructure? Isn’t it amazingly corrupt? Wouldn’t its contempt for liberal democratic values doom it to stagnation? And what happens now that oil production, the main locomotive of the Russia economy, has stalled thanks to the politicized persecution of “brilliant entrepreneurs” like Mikhail Khodorkovsky? Indeed, was not its economic collapse in 2009 a portent of things to come? And so on*.

There are many reasons to dismiss these arguments, as I will try to show in this post. First, the very inventor of the BRICs concept, Jim O’Neill of Goldman Sachs (who has probably thought more about it than anyone else) dismisses the argument that Russia is ineligible on the basis that is was the only country amongst them to show (highly) negative growth during the economic crisis as “rubbish”. He goes on to add that “the only reason that Russia was hurt so badly was unlike the others, it borrowed heavily on the international capital markets and, of course, it is dependent on the price of oil.” ** Of course, the Russian economy’s dependence on Western intermediation for its credit is a structural weakness, and one that was exposed in late 2008. But potential faultlines like this are hardly unique amongst the BRICs – its most promising member, China, critically depends on exports for continued growth***, and its banks are saddled with bad debts.

Second, many of these arguments from demography (“dying Russia”), infrastructure (“crumbling Russia”), and institutions (“Zaire with permafrost”) are both 1) exaggerated in severity and 2) exaggerated in their influence on economic development.

Take Russia’s plummeting population… except that it hasn’t been plummeting or even falling since 2009! (It is now stagnant). True, Russia is going to see a substantial fall in its labor pool – according to the Rosstat medium scenario, from 62% of the total population now to a truly apocalyptic 55% by 2030****. (Yes, that was sarcasm). And though its population will age substantially in the next few decades, there probably won’t be any problems with paying pensions thanks to its resource wealth. Basically, Russia’s demography is neither as bad as it is usually portrayed in the Western media, nor will it negatively impact on its future economic development in any significant way.

Now what about Russia’s crumbling infrastructure? Though Russia having no roads, only directions may be cliché*****, it does undoubtedly have an element of truth. But look at this from another perspective. Russia might have plenty of crumbling concrete and rusting iron carcasses, interspersed with the occasional modern highway or recently-built gleaming showpiece – but does it really, really need better infrastructure, or are its resources better spent elsewhere? At least unlike India, or even Brazil or China, Russia has a complete industrial infrastructure. Its “Khrushchevki” prefabricated concrete tower blocs and disused railway stocks may give it a decrepit, even post-apocalyptic air, but the equivalent scene in India or China may well consist of a village of peasant huts with dirt paths meandering through it! In other words, Russia needs new infrastructure relatively less than the other BRICs (yet even so, Merrill Lynch predicted it would spend more in the next three years than either India or Brazil, despite its smaller population)!

Finally, yes – Russian institutions are corrupt and its state is illiberal and (semi-)authoritarian, though arguably it is democratic****** (of course the degree to which this is the case can be subject to endless debate). However, the evidence indicates that institutions have historically had relatively little impact on economic growth or “convergence”. A multi-author NBER study in 2004 on Do Institutions Cause Growth? was summarized thus:

We revisit the debate over whether political institutions cause economic growth, or whether, alternatively, growth and human capital accumulation lead to institutional improvement. We find that most indicators of institutional quality used to establish the proposition that institutions cause growth are constructed to be conceptually unsuitable for that purpose. We also find that some of the instrumental variable techniques used in the literature are flawed. Basic OLS results, as well as a variety of additional evidence, suggest that a) human capital is a more basic source of growth than are the institutions, b) poor countries get out of poverty through good policies, often pursued by dictators, and c) subsequently improve their political institutions.

Russia seems to fit the above model reasonably well. It has high human capital – far better than China or Brazil, let alone India. As I wrote earlier, “Around 70% of Russians go into higher education, compared with just 20-25% of Brazilians or Chinese… in the 2006 PISA science assessment, only 15.2% of Brazilians possessed skills beyond those needed for purely linear problem-solving, compared with 47.6% of Russian and 51.3% of American students”. Already resembling a developed country in human capital and having pursued reasonably effective economic policies under Putin, Russia may now slowly be moving towards surmounting that last institutional hurdle, with Medvedev now taking aim at the MVD (police) and bureaucracy.

Finally, it would be well to point out one area in which Russia has a decisive advantage over the other BRICs – it is already a much more developed economy and society. As of 2009, and despite the economic crisis, Russia’s real GDP per capita was 14,900$, far higher than Brazil’s 10,500$, China’s 6,600$, and India’s 2,900$ (not to mention that Russia’s Gini index of wealth inequality, at 41, is lower than both China’s 47 and Brazil’s 57). Really, the most convincing reason to leave Russia out of the BRICs is not that it doesn’t belong there, but that it won’t grow as fast as the others simply because it is already substantially richer than them and as such no longer has as much space to catch up! (And hence would not be as attractive to investors)…

That said, Russia in the next decade will probably grow relatively fast nonetheless – not only because it is a well-educated nation with substantial room left for “catch up” growth to developed world levels, but because of a very favorable external environment. First, the (probable) peaking of oil production and China’s ravenous growth******* means that oil and resource prices will remain high, bringing in the hard currencies that would help Russia buttress its fiscal position and buy the technologies it needs to modernize itself from the West.

Second, in a dramatic turnaround from 1998, Russia today is now in a much stronger long-term fiscal position than practically any Western developed country. The article Rerating Russia by Ben Aris is worth quoting in extenso:

Russia’s credit rating is way too low, as it boasts some of the strongest fundamentals in the world, but it’s still tarred by its increasingly irrelevant “emerging market” moniker… The world has been turned upside down by the global financial crisis. Nowhere is this clearer than in [Greece's and Russia's] bond offerings. While Greece is sagging under a heavy public debt burden, Russia not only has almost no debt to speak off (Capital Economics predicts 9.5% of GDP by the end of this year), but also has well over $400bn in hard currency reserves. That’s five times more than either the US or UK, making it the third-richest country in the world in terms of cash. …

Russia is enjoying a mirror image of the problems its more developed peers are facing up to. For example, the UK is one of the most indebted countries in Europe now after it borrowed a massive €257bn last year, ratcheting up its leverage to borrow about €2.80 for every €1 that the Bank of England is holding in its vaults as a reserve. The US is in similar dire straits.

… Currently, Russian sovereign debt has a ‘BBB’ rating, which is only two notches above junk bond status. At the same time the US and UK have (so far) kept their ‘AAA’ ratings despite their worsening finances. Most economists are predicting Europe’s external debt to rise from 100% of GDP to 130% over the next five years, while that of Russia is expected to continue falling. Indeed, analysts say that the ratings of developed countries’ have disconnected with reality, while countries like Russia are being penalised. “On the basis of our model, the [best possible] ‘AAA’ rating for the US and the United Kingdom cannot be explained, as these two countries are rated two to three rating notches better than countries with comparable fundamental data,” Ingo Jungwirth, an analyst with Raiffeisen International, wrote in a study in March.

His study found that based solely on the country’s finances, both the US and UK should be downgraded three notches to a ‘AA’. However, if the ratings agency actually went through with a downgrade, the cost of borrowing to both countries would spike and spark a financial global crisis, which would probably wreck the global economy for decades. Jungwirth suggests that these two countries earn a “bonus” for being too big to fail.

On the flip side, Russia is underrated given the strength of its financial position. Consider that on the day Iceland defaulted on its debt at the start of this crisis, it enjoyed higher ratings than Russia. Today Russia’s ‘Baa1′ rating from Moody’s Investors Service is still the same as bailout-dependent Iceland’s. Fitch Ratings and Standard & Poor’s currently class Russian debt as ‘BBB’ – even lower than Moody’s. …

There are already some signs that investors are cottoning on to the strength of the Russian bond offering. After US investment bank Lehman Brothers collapsed, the spreads on UK credit defaults swaps (CDS) … have soared by 281 basis points (bps). At the same time, Russia’s CDS have actually contracted by 17 bps over the same period, making it one of the few countries in the world deemed by investors to be a safer place to invest than it was before the start of the crisis. …

The US, Japan, and most of Europe have reached their limits to growth. Now faced with unsustainable budget deficits, ballooning debts, and intense (BRIC-centered) competition for remaining high net energy resources, the long era of Western hegemony is now coming to an end. It is thus with some skepticism and bemusement that I view the smug commentary in the Western media on the Russian Foreign Ministry leak published at R ussian Newsweek********, which they claim show Moscow’s “planning to reorient its foreign policy in a more pragmatic and pro-Western direction”, in apparent acknowledgement of its failed policies of dirigisme within and confrontation without.

In reality, the Kremlin’s détente-for-modernization leak is more likely to be an Aesopian telegram that conveys Russia’s satisfaction with what it has already achieved and of the new world order that is emerging. In the past decade, the Russian state has consolidated and reestablished a sphere of “privileged interests” across Eurasia, decisively purging Ukraine and Central Asia of Western influence. Meanwhile, with the United States facing severe fiscal stress and geopolitical challenges on other fronts in the Middle East and the Far East, the West now has neither strength nor will to push back against Russia beyond Visegrad, and is beginning to lose its unity and cohesion. Russia’s security dilemma is retreating, as a new geopolitical equilibrium crystallizes along the marches between the West and Eurasia.

Since good fences make good neighbors, this paves the way for better relations between Russia and some Western countries, in particular Germany, Italy, and France (in the Russian leak, Britain is conspicuous in its absence). Take the former. What interest does Germany really have in sending soldiers and paying taxes to perform a doomed “civilizing mission” in Afghanistan for the US, or in subsidizing Mediterranean profligacy while imposing stringent discipline on itself in return for their (aging and shrinking) markets? On the other hand, there is great potential for synergy between the German and Russian economies. The Teutonic industrialists have technologies and capital that Russia now needs to modernize its manufacturing and hi-tech industries, while the Russians have the energy and mineral resources that could keep German factories humming well into the age of scarcity industrialism. Back in October 2009, I suggested that this economic relation could be the basis for a new German-Russian alliance; now the New York Times has caught on.

The American age of dominance is waning and will soon come to an end and a new constellation of Powers will take its place. Far from being a shunned BRIC in a world run by the West, Russia will be one of the main poles in the new world of the Rest.

* See Nouriel Roubini, Anders Aslund or Julia Ioffe for the standard spiel.

** See “The R of the BRICs Remains Solid” part of this post.

*** Of course there are arguments that the magnitude of these problems are overstated.

**** The irony is that the more Russia’s (abnormally low) life expectancy and (now fairly average by European standards) fertility rates improve, the worse its dependency ratio will get in the decades ahead! Yet another demonstration of the stupidity of simple-minded extrapolation of population trends to future economic prospects.

***** In any case, in an age of peak oil, the wisdom of expanding road networks further is open to question. Russia would be better served by modernizing its railway system, on which it plans to spend 390bn $ by 2030.

****** On the basis that it fulfills democratic norms on paper although not in spirit, and in the sense that most Russians believe Russia is free and democratic (as was not the case during the Yeltsin period). Both the Polity IV political database and Economist Democracy Index perceive Russia as a kind of hybrid regime that is neither liberal democratic nor fully authoritarian.

******* This illustrates another important point – the BRICs are greater than the sum of their parts; they are more of an idea and a concept, than some kind of ranking in which countries can be kicked out of for (perceived) lack of performance. Strong Chinese and Indian growth, for example, help pull along nations like Russia or Brazil that are more heavily based in resource extraction.

******** See the full “О Программе эффективного использования на системной основе внешнеполитических факторов в целях долгосрочного развития Российской Федерации” here.

(Republished from Sublime Oblivion by permission of author or representative)
 
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This April, Michael Bohm, editor at the Moscow Times, published the article New Kremlin Dreamers, which questioned Russia’s stated intention of becoming an advanced industrial nation by 2020. I wasn’t much impressed by its pessimistic assertions – for instance, regarding Russia’s hopes of becoming the world’s fifth largest economy by 2020, he falls into the frequent Kremlinologist fallacy of applying standard GDP growth rates to nominal GDP (as opposed to purchasing-power parity GDP, which corrects for exchange rate fluctuations). He similarly passes over that countries in the process of economic catch-up typically grow much faster than the leader nations, because they have greater returns to investment. Soon after Yevgeny Kiselyov wrote Dreaming of Modernization and Innovation on a similar theme.

I disagree with them on two fundamental points. First, I don’t share in their pessimism and I believe that on purely objective factors, Russia – and much of the rest of East-Central Europe for that matter – is well set to converge to Western living standards by 2020 (which will by then probably be stagnating in light of peak oil and intensifying competition for energy resources from other emerging-markets). This is a point I made a long time back in Towards a New Russian Century? and Education as the Elixir of Growth. Second, even if that were not the case there is still a lot to be said of the power and utility of positive, optimistic thinking – ambition is no sin in my eyes, and in the case of government a moral duty to their citizens. Hence this rebuttal. ;)

Two recent articles in the Moscow Times took issue with the “Kremlin dreamers” for their rose-tinted views of Russia’s destiny, alleging that the main goals of “Strategy 2020”, like becoming the world’s fifth largest economy or doubling GDP per capita, are nothing more than utopian pipe-dreams. Yet an objective look at key current trends – in educational attainment, economic growth, resource depletion and climate change – suggests that these “fairy tales” have the potential to become reality.

First, Russia’s educational profile resembles that of a First World country, unlike most of its emerging-market competitors. Around 70% of Russians go into higher education, compared with just 20-25% of Brazilians or Chinese. The quality of its primary education is substantially higher than in developing nations, as attested to by the results of international student assessments like PISA or TIMSS. For instance, in the 2006 PISA science assessment, only 15.2% of Brazilians possessed skills beyond those needed for purely linear problem-solving, compared with 47.6% of Russian and 51.3% of American students. A country needs to have sizable cadres of skilled workers to move into added-value manufacturing or complex services. Brainier nations will also assimilate technology more easily and thus their economic “rate of convergence” to developed-world status will be that much faster. In this respect, Russia and east-central Europe are in a different league from East Asia, let alone Latin America or the Middle East.

Second, while there’s no denying Russia is plagued by corruption, to suggest it is endemic like in a failed state, as suggested by Transparency International’s Corruption Perceptions Index, is ludicrous – and would frankly be obvious to anyone who has visited both Russia and some of its neighbors on the list. Its problem is that it’s a survey of outsider businesspeople and their subjective perception of the situation, which differs markedly from the experiences of ordinary people. When asked, only 17% of Russians admitted to paying a bribe to obtain a service in 2007, according to TI’s Global Corruption Barometer – putting them in the same quintile as Turkey or the Czech Republics, i.e. slap bang in the middle of world corruption, not the end. The effects of corruption must also be set in context against a panoply of other, equally important growth factors. Goldman Sachs compiled an index called the Growth Environment Score, which aggregates a wide range of stats on macroeconomic, institutional, educational and technological conditions to assess a nation’s potential for economic “catch-up”. In 2007, Russia came in at 66th out of 181 countries, tied with China and ahead of Brazil and India.

Third, to fulfill one of the main goals of “Strategy 2020” – to become the world’s fifth largest economy, all Russia has to do is surpass Germany in purchasing-power parity GDP. Since according to the IMF Russia’s GDP was 2.26bn $ and Germany’s was 2.91bn $ in 2008, this can be achieved merely by maintaining an average growth rate of 2% points higher than Germany to 2020 – which seems entirely feasible considering that from 1999-2008 this difference was more than 4%. Doubling the GDP per capita over the next 11 years is trickier and requires continuing the average 1999-2008 growth rate of 6%. Though complicated by the current economic crisis, coming close is still entirely possible.

Fourth, Russia’s economy is not overly dependent on natural resource exports – they have stagnated since 2003 and the bulk of growth came from retail, construction and manufacturing. They are however crucial to replenishing government coffers, allowing the Kremlin to spend lavishly on things like military modernization, infrastructure expansion and prospective sunrise industries like nanotechnology – thus turbo-charging its plans for an “innovation economy”. (Granted, some is wasted like the 1bn $ project on the bridge to Russki Island, i.e. to nowhere). Fortunately for Russia, there’s no reason to believe oil prices will remain low. Even now, in the depth of the biggest global economic crisis since the Great Depression, prices never fell below $40 a barrel and have now rebounded to over $60. With oil production close to or already past its peak and Chinese voraciousness unquenched, a second oil price spike is only a few years away.

Finally, according to researcher Trausti Valsson, further in the future global warming will unfreeze remote energy resources in the Far North to exploitation, open up the Arctic to shipping, bolster Russian crop yields and increase the carrying capacity of Siberia and the Far North. Russia could literally end up on top of the world.

Wells may have ridiculed Lenin as a “Kremlin dreamer” in 1920, yet precisely a decade or so later the Soviet Union began to produce aircraft, tanks, trucks, machine tools and chemicals, boasting growth rates far higher than that of any other industrial nation. And though the USSR did set over-ambitious goals for the Five Year Plans, the achievements were impressive nonetheless.

By 2020, Russia will experience increasing problems due to adverse demographic trends, slowing growth due to (paradoxically) successful “catch-up”, and perhaps waning European demand for its natural gas and dissatisfaction with an increasingly atrophied and unresponsive descendant of the “Putin system”. As such, far from being a fairy tale, the “Kremlin dream” is a strategy for maintaining Russia’s geopolitical relevance well into a troubled 21st century.

(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.