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Rhetoric about it being “Nigeria with snow,” “Zaire with permafrost,” “Upper Volta with missiles,” “gas station masquerading as a country,” etc., regardless, the fact of the matter is that Russia does have a respectable manufacturing base.

This should be pretty obvious just from a quick perusal of the sorts of manufactures Russia produces:

  • A vast military-industrial complex that produces (and exports) on a scale and versatility exceeded only in the US.
  • Rosatom is building an amazing 40% of all the nuclear power plants currently under construction in the world. 10% of the world’s power turbines are made at the Leningrad Metallurgical Factory.
  • More prosaic but also more generally indicative, Russia produces about 2 million cars annually, which is about the same as in the UK and France, and thrice more than in Italy. This satisfies around 70% of its total domestic sales – virtually the exact same percentage as in the US and UK

This is not, of course, to make Russia out to be some kind of manufacturing behemoth like Germany, Japan, or Korea. It is however on approximately the same level as the European economic Middle Powers of France, Italy, and the UK, as well as that of fellow BRIC members Brazil (which has a 35% larger population) and India (which has eight times its population). In other words, it is broadly what you would expect based on its GDP and status as an upper middle income country.

This is pretty elementary stuff any other journalist or pundit can discover for himself through a quick glance through the various economics statistical databases on the Internet. The figures below were derived from the World Bank’s data on nominal GDP and the share of manufacturing in the economy for 2013.

Country Manufacturing Output in 2013
China $2,923bn
USA $2,081bn
Japan $912bn
Germany $829bn
Korea $404bn
Italy $327bn
India $321bn
France $318bn
Russia $308bn
Brazil $276bn
UK $259bn

And here is a historical graph showing Russia’s manufacturing sector on a global perspective (log scale) since the early 2000s.

world-manufacturing-1990-2014

To be sure, yes, Russia exports very little of this. As mentioned, its manufacturing base is to a very large extent domestically orientated. Instead, its exports are dominated by oil, natural gas, and metals, of which it has a cornucopia.

Why? Because comparative advantage, otherwise known as Economics 101. A concept that in Russia’s case the Western media consistently has trouble with.

Cue the famous graph of Russia’s exports structure that supposedly makes it a gas station:

russia-exports

… which if so would then make Australia, a well educated nation and one of the richest in the world, nothing but a coaling station.

australia-exports

Incidentally, what makes the “Nigeria with snow” rhetoric so convenient is that it can be – and is – wielded against Russia regardless of what actually happens to the oil price. If it goes up, emphasis can be put on the increasing dependence of the Russian budget, exports, and overall economy on hydrocarbons. If it goes down, you can instead focus on the imminent fiscal collapse – no matter that Russia has almost $400 billion socked away and that its current budget deficit is close to non-existent. Regardless of what happens with the oil price, doom is always preordained. And there is nothing that Russia can do about this “oil dependence” in anything but the very longterm short of nuking all its oilfields.

I would write more but Ben Aris writing in February 2014 in response to a typical hackneyed Economic editorial on how Russia is hopelessly addicted to oil and about to collapse any moment now has made any such effort redundant, so I will instead save myself some work and quote him in extenso:

“this achievement was founded almost entirely on oil and gas prices, which have climbed fivefold since 1999.”

So now we launch into the core of the attach, the increasingly hackneyed argument that “all Russia’s prosperity is due to its gift of oil and the government has done nothing else to make life better.”

This argument is becoming extremely tiring and moreover as time passes it is demonstrably not true. Oil remains very important but a lot has changed in Russia in the last decade, which is being willfully ignored.

Firstly oil prices didn’t take off until about 2005. Prior to that the long-term average was $25/barrel. And yet Russia put in 10% GDP growth in 2000 and continued to grow at least 4-5% until 2005. And only then did oil prices take off lifting growth to 6-8%.

So if Putin is so rubbish and all the good stuff depends on oil, how did he manage to get all that growth in the years when he had the same oil prices as Yeltsin had??? Could it be that something else happened? Could it be that the devaluation of the ruble had a positive effect? Could it be that oil companies invested more in themselves in 2000 than in all the 1990s. Could it be this started off a virtuous circle of growth, investment and rising wages that lead to other companies appearing to take advantage of this new money? And if not, where did all those consumers come from that have been driving Russian growth in last five crisis years? Just askin’… because according to the Economist analysis it appears that oil pours directly into Russians pockets which they then go out and spend in the shops.

“Dependence on energy exports is greater even than under the Soviet Union: they now account for 75% of the total, against 67% in 1980.”

Journalism 101: “when citing statistics, you need to attribute them to the valid source so they can be checked.”

This number is flat out wrong, or made up, or I don’t know as the author doesn’t say where it comes from. The last number I have is from the Russian customs service and is 49.4% export revenues for oil and 11.7% for gas in 2013 – a total of 61.1% of export revenues which is LESS than the “Soviet number” (where ever that is from).

No one is denying that oil and gas play do provide funds to pay for lots of other things the government wants to do – and so impede reforms because the government is so actively throwing money at problems. But the statistic that everyone who makes this argument always skips over is that oil and gas only account for about 15% of GDP in terms of value created according to Rosstat; the service sector made up just over 50% of GDP in value terms last year. Russia is not just a black and white petroeconomy.

Oil is of course even more important than that as it has direct knock on effects to other industries. A paper from the highly respected Bank of Finland economic analysis team (BOFIT) tried to assess exactly how important oil and gas are to the Russian economy. It adjusted the number up to about 25% of GDP and made this conclusion: “When adjusted to reflect the oil and gas sector’s actual contribution to GDP, Russia is on par with Norway (Table 2). This is much less than traditional oil states such as Saudi Arabia, which generates about half of its GDP directly from the oil and gas sector.”

Lets just pause for a moment and take that in: Russia’s dependence on oil and gas is the same as that of NORWAY…. not a true petro-economy like Saudi Arabia.

“Ten years ago the Russian budget balanced if oil was around $20 a barrel; today it needs to be around $103.”

Yeah, and ten years ago you could buy a coffee in London for 50p and not the £5 a cup it costs now. This “balance-the-budget” price of oil is another myth.

What you need to look at is the non-oil budget deficit (the federal budget deficit Russia would have if you magic all the oil and its revenue away). In the boom years of 2006-2008 Russia was running a health budget surplus, but it as also running a non-oil budget surplus of about 1%. In other words it had broken its addiction to oil as the real economy was producing enough tax revenue to finance everything before a dollar of oil tax money was received. That changed in 2008 when the non-oil deficit when down to 14% and the state poured rescue money into the economy, but has recovered somewhat since and the plan is to take the non-oil deficit back to about 4-5%. In other words the government was to modest subside the budget with oil money. It is actually an extremely reasonable plan and how the budget was run in the first half of the last decade.

However, in the 90s the non-oil deficit was over 25% of GDP. In other words under Putin the fiscal oil dependence has steadily decline as that service sector and other industries increase their share of the economy, but the crisis was a big set back – and thank god for that oil as it is the cushion that has given Russia a soft landing.

Bear this in mind whenever you encounter the next loud proclamation about how Russia is [insert banana country]-with snow that doesn’t produce anything.

 
• Category: Economics • Tags: Manufacturing, Oil, Russian economy, RussPol 
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More info against the Department of Russia Only Produces Oil and Vodka: Here are some graphs of Russian aerospace manufacturing courtesy of the Reality vs. Myths blog. (2013 figures are projections).

russia-helicopter-construction-gloriaputina

Total helicopter construction has now basically converged with the levels of the late RSFSR.

russia-aircraft-construction-gloriaputina

Aircraft construction is only halfway there, but its state is nonetheless leagues better than it was in the depths of the post-Soviet freefall. As the blogger points out, its poorer performance via-a-vis helicopters can be explained by the fact that the technologies used in Soviet civil aircraft was outdated, so the Russian industry essentially had to start over from scratch. Nonetheless, it seems to have reached the point of a rapid further up-trend, presumably driven by the Sukhoi SuperJet 100 as it enters mass production. The United Aircraft Corporation, the holding company into which independent Russian aircraft companies were consolidated in 2006, projects production increasing to 160 units by 2020.

(Republished from Da Russophile by permission of author or representative)
 
• Category: Foreign Policy • Tags: Economy, Manufacturing, Soviet Union 
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One common trope about the Russian economy is that it has virtually no manufacturing to speak of and lives off “oil rents” that can collapse any day.

Whiles there is a small nugget of truth to this assertion, but by and large it is simply false. It is true that a great chunk of Russian exports do accrue to hydrocarbons and metals, because that is its comparative advantage in trade. That said, there are plenty of Russian products on the domestic market. The automobile industry is a good and representative example of this because they it’s a stalwart of many national economies and there exist reliable and easily accessible statistics on it.

Car Production Car Sales Autos self-sufficiency
Czech Rep. 1,178,938 193,795 608%
Mexico 3,001,974 987,747 304%
South Korea 4,557,738 1,530,585 298%
Poland 647,803 328,532 197%
Japan 9,942,711 5,369,721 185%
Germany 5,649,269 3,394,002 166%
Turkey 1,072,339 817,620 131%
China 19,271,808 19,306,435 100%
Argentina 764,495 832,026 92%
Brazil 3,342,617 3,802,071 88%
South Africa 539,424 623,921 86%
France 1,967,765 2,331,731 84%
Russia 2,231,737 3,141,551 71%
USA 10,328,884 14,785,936 70%
UK 1,576,945 2,333,763 68%
Sweden 162,814 326,441 50%
Italy 671,768 1,534,889 44%
Ukraine 76,281 263,604 29%
Australia 209,730 1,112,132 19%

As such, I decided to compile a representative list of countries, with data on production and sales for 2012 drawn from OICA, in order of the ratio of their auto production to new auto sales – that is, their degree of self-sufficiency in cars.As we can see above, while Russia is perhaps rather lower than average, its domestic auto manufacturing industry nonetheless manages to satiate 71% of demand for new cars.

This is quite comparable to France, the US, and the UK, and is vastly higher than a similarly resource-dependent rich country, Australia. Quite a lot of other resource-heavy countries like Saudi Arabia, Venezuela, and Norway don’t produce cars at all. Mexico is a huge exception, but the reason for that is that it borders the US and the US has outsourced quite a lot of its auto industry south of the border to take advantage of lower labor costs – a situation analogous to the Germans’ outsourcing of car production to Spain in the 1980′s, and Central-East European countries like the Czech Republic, Slovakia, Hungary, and Poland in the 2000′s.

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

russia-automobile-production

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(Republished from Da Russophile by permission of author or representative)
 
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Russia has a long and proud drinking culture; according to the chronicle of its founding, the main reason it chose Christianity over Islam was the latter’s prohibition of booze. Vodka has been distilled there since at least the 12th century. As of the time of writing, it is the world’s largest spirits market by volume – 2.4 billion liters in 2009, according to the Scotch Whisky Association (SWA), of which more than 80% accrues to domestic vodka brands. Whiskey’s share is only 0.5%; but it is growing at explosive rates, and whiskey now account for two thirds of all spirits imports. Indigenous distilleries are sprouting up and conditions appear favorable for this growth to continue.

In the Soviet period, the only spirits available to most citizens were vodka and cognac from the Caucasus – a point illustrated by Erkin Tuzmukhamedov, one of Russia’s leading sommeliers and author of whiskey books, who got his first taste of Scotch by taking sips on the sly from the bottles his diplomat father brought home from abroad. This changed with the opening up of markets in the early 1990’s. Whiskey consumption has seen tremendous growth; the SWA says exports to Russia have risen from £5m to £31m in the past decade.

Though starting from a low base in comparison with the biggest Scotch markets, such as the US’ £499m, growth is expected to remain double-digit well into the future for three main reasons. First, rising incomes means Russians can afford to develop more refined tastes. Second, the growing segment of female drinkers favors spirits that can be sipped. Third, the government plans to quadruple the currently low excise duties on spirits by 2014, thus narrowing the cost differential between vodkas and whiskeys. All this implies growth for blends, which dominate the Russian whiskey market – for a time, Tuzmukhamedov was Dewar’s chief promoter in Russia – and very strong growth for single malts.

Reactions to inquiries about indigenous Russian producers was dismissive, their current presence being described as “fairly negligible.” There are some distilleries that have laid down their own malts, but are currently maturing and won’t be ready for years. One example is Viski Kizlyarskoe, a Daghestan-based brand that in 2008 laid down test run trials of all major types of whiskey – malt, grain, and blended – and is building a $7m distillery.

Praskoveysky distillery

Praskoveysky distillery

Another is the Praskoveysky distillery based in Stavropol, which has been producing wine and cognac since 1898. In 2008, it expanded into whiskey, starting up production in oak barrels on Irish technology. The factory manager, Boris Pakhunov, claims that it has a better nose than the Jameson that inspired his brand, and the honey tones are sharper.

The first samples from both are coming to market just now, and once in mass production prices are expected to range 300 to 400 rubles ($11-15) – an economy class alternative to vodka and the most popular imported brands in this category, such as White Horse or Famous Grouse.

Later, in May 2010, the Urzhum spirits distillery announced the launch of its own line, headed by “Officer’s Club.” Another increasingly popular approach is to just import whiskeys from abroad and bottle one’s own blends, as done by the Kaliningrad-based distiller Alliance 1892 in February of this year. It’s product, “Seven Yards”, went on sale this May, costing $18 per bottle.

So it’s a beginning of sorts, if not an overly impressive one thus far. Nonetheless, as whiskey’s following grows, this could change. According to Tuzmukhamedov, there are whiskey appreciation societies in the biggest cities like Moscow, St. Petersburg, and Yekaterinburg: “I’ve met ordinary guys who save their money to go on holiday to Islay – that’s not affectation, that’s appreciation of the drink.” He should know, as he runs Dewar’s new whiskey academy in Moscow, whose one month courses have become very popular with restaurateurs.

Whither now? Tuzmukhamedov is very skeptical that whiskey will ever displace vodka as Russia’s national drink, because vodka has the weight of tradition behind it and goes much better with the staples of the Russian diet. Though there is a lot of room for growth remaining, he expects it to eventually level off. Russian whiskeys are likely to become more prevalent on the Russian market, and some may even be exported. There is an antecedent for this in Baltika beer, which began brewing in 1990 on foreign techniques and can now be found in Western supermarkets.

That said, there is still a long way to go. According to Tamerlan Paragulgov, the director of an alcohol standards agency, many of the fledgling Russian whiskey makers still have fairly obsolete marketing standards; case in point, the Praskoveysky winery and cognac distillery is still run in a leisurely and paternalistic fashion as a Soviet-style enterprise. Another problem, according to Tuzmukhamedov, is that it is very hard for a small producer like Praskoveysky to establish itself in competition against the big names.

The experiments of today’s Russian whiskey producers may garner interest among whiskey circles in Russia, but they will have to get more serious about marketing and raising capital if their products are to break out into the wider market.

See more

(Republished from Sublime Oblivion by permission of author or representative)
 
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I’ve been accused of being a “Russophile cockroach”, an “amoral Putin lackey”, and overall bad guy. Guilty as charged! Yes, I do like Russia and don’t have much good to say about the Western media’s coverage of it. Yes, I don’t give much of damn for the moralistic posturing that any vapid idiot Kremlinologist can easily excel in. And yes, I do have a positive opinion of Vladimir Putin (as do 75%+ of Russians). Now granted, part of this probably has something to do with the huge amounts of money his FSB minions kindly slip under my door for glorifying their Tsarist godfather on the Internet in my spare time. But this doesn’t necessarily mean that I set my alarm clock to VVP’s speeches, drink prodigal amounts of Putinka for breakfast, and bow before his icon at the Altar of Neo-Stalinism in my basement before logging onto my workstation to fulfill my job description as ein strammer Putin-soldat. In reality, my positive view of Putin is moderate and hedged.

Don’t believe my word as “the dishonest, progangadizing (very, very) little maggot” that I really am? Below I present five major shortcomings of the Putin Presidency.

What Putin did wrong

1. Waiting until 2006, or too little too late.

Since 2006, Russia embarked on a range of policies designed to check its demographic decline, reduce poverty, and recover its status as a Great Power. The main examples would be the National Priority Projects; a revamped industrial policy; health promotion; pro-natality, AIDS containment and anti-alcohol measures; military modernization; and incubation of hi-tech industries such as nanotechnology. Many of these are already bearing fruit – quite literally on the demographic front, where the total fertility rate rose to 1.56 children per woman by 2009, from 1.1-1.3 before 2006. In conjunction with falling mortality rates, this resulted in Russia experiencing its first year of population growth in 2009 since 1994. But why did Putin take so long to start addressing all these issues?

Though there are several possible explanations, I think the most accurate is that at the time Putin was simply too preoccupied with stabilizing the Russian shell of the collapsed Soviet empire. Each functioning state rests on its monopolization of legitimate violence, of tax collection, and of the issuing of money. All three monopolies were under grave threat by the late 1990′s. Homicide rates were sky-high, organized crime infiltrated state structures, and Chechen bandits raided Russia proper. The state was too weak to collect taxes from the oligarchs, producing chronic budget deficits that culminated in the 1998 default. Inflation raged unchecked, most transactions were in dollars or in kind, and many analysts were starting to describe Russia as a failed state. Therefore it cannot be surprising that Putin in his first term devoted most of his attention towards containing and mitigating these mortal threats to the Russian state. The invasion of Chechnya, the political subjugation of the oligarchs, the strengthening of the “power vertical” – all these were intended to restore some modicum of state control over the Russian Federation.

Yet as the political struggle went on at the top, the “real Russia” remained largely stagnant. With the inflow of ethnic Russians from the Near Abroad largely exhausted, demographic decline accelerated in the 2000-2005 period. In contrast to the broad-based growth after 2005/2006, in the early Putin years manufacturing remained depressed, while more than a third of economic growth accrued to the recovery in oil extraction. Little new infrastructure was built. The rate of military procurement dropped even below the miserly levels of the Yeltsin era. Thanks to the Putin government’s myopic negligence or administrative inability, Russia’s manifold, deepgrained socio-economic problems only began to be seriously addressed within the past few years.

Strike 1 – Contrary to most fans and critics alike, Putin didn’t do too much. He did too little, and too late. Under the first few years of his watch, Russia lost historical time just as it did under Yeltsin. On many socio-economic indicators, the RF in 2010 has only caught up to what the RSFSR achieved back in 1990.

2. Red tape and corruption, or the bureaucracy is expanding to meet the needs of an expanding bureaucracy.

Corruption remains “public enemy number one”, according to President Medvedev. This can be confirmed by any number of horrific anecdotes: the absurdly inflated Moscow housing market, bureaucrats owning property worth hundreds of their yearly salaries, entrepreneurs losing their businesses to well-connected thugs. Apart from a few cosmetic house-cleaning campaigns under the Putin President, the state’s efforts to control this scourge have been decidedly lack-luster, and Russia continues to be perceived as one of the most corrupt nations on Earth.

[Sources: Transparency International's "Corruption Perceptions Index"; Transparency International's "Global Corruption Barometer", answers to the question, "In the past 12 months, have you or anyone in your household paid a bribe in any form?" (% saying "yes"); World Bank's "Worldwide Governance Indicators" (Control of Corruption), country percentile].

This corruption is directly related to the arbitrary power of Russia’s bureaucracy, and the labyrinth of regulations that “justify” its existence. Love them or hate them – and yes, most Russians hate them – bureaucrats are indispensable for running a modern state. However, in Russia bureacrats are neither accountable unlike in most developed nations nor held under close scrutiny unlike in the USSR or today’s China. Furthermore, their numbers are well in excess of necessity. In contrast to a few post-Soviet nations like Estonia and Georgia which fired many of their bureaucrats, the Russian bureaucracy grew rapidly under Putin.

[Source: Rosstat].

The extractions of rent-seeking bureaucrats stunt the development of small and medium businesses. Furthermore, corruption indirectly kills people (e.g. grocery pharmaceuticals are expensive and unreliable) and fosters a destructive social mentality in which anything and everything is considered exchangeable for money and the privileged and connected can act with impunity.

As the man at the top of the pyramid, Putin was responsible for perpetuating this system during his Presidency. Sensational rumors of foreign villas and multi-billion dollar offshore accounts to the contrary, there is no evidence that Putin is personally corrupt*. However, controlling corruption within one’s circle and further down is extremely hard; no Russian ruler, except the most steely and despotic, has ever managed to rein in his bureaucrats. Now you could go down the neo-Stalinist route, but executing corrupt bureaucrats is now politically incorrect in most places outside China. Perhaps Putin should have simply axed this Gordian knot, like Saakashvili in Georgia**? That might have worked, – no regulation, no bureaucrat, no problem. But something stayed his hand. Maybe he feared chaos, since the bureaucracy is one the forces gluing a nation together. Maybe they were considered necessary to reconsolidate the state and rebuild the power vertical. I don’t know.

Maybe Putin shouldn’t have suppressed Russia’s civil society and media outlets if he was serious about checking corruption? But this is a false narrative. It is not the federal government or Putin, but unreformed institutions such as the Ministry of Internal Affairs (MVD), the FSB, the Prosecutor-General, etc, that pose the greatest hazards to Russia’s nascent civil society. It is not VVP who runs around killing and harassing journalists, but the “stationary bandits” in government and/or business taking advantage of Russia’s culture of impunity. The ultimate proof of the pudding is Ukraine – despite its pluralistic politics and journalistic freedoms after the Orange Revolution, corruption there remains at least as bad as in semi-authoritarian Russia***. No matter the personal integrity or ability of Russia’s (or Ukraine’s leaders), the entire post-Soviet state system remains unacceptably opaque and unaccountable.

Strike 2 – Putin could have mitigated Russia’s corruption and culture of impunity by: 1) stripping away the reams of red tape that create opportunities for rent-seeking, 2) decimating the ranks of the bloated bureaucracy, traffic police, etc, or 3) increasing the penalties for, or the “costs” of, corruption. In reality, there was some improvement in 1) and 3), and massive backtracking on 2). It is only under Medvedev that government and citizenry are beginning to show signs of taking corruption more seriously.

3. Inequality, or oiligarchs & their little adults.

Russians are not Americans. Though most accept the capitalist system, a majority of Russians believe the state has a duty to narrow down inequality between rich and poor and assure everyone a decent standard of living. Opinion polls indicate that around 63% of Russians are essentially “statists”, while only 25% are economic “liberals” and an insignificant 4% are small-government libertarians. Thouh there has been impressive progress on lifting all boats in the past decade – poverty rates were slashed, consumer goods became much more affordable – the Putin regime also presided over an era of slowly rising inequality****. This does not sit well with many Russians, especially the elderly who put great stock in egalitarian values.

[Source: Rosstat].

It is no great exaggeration to say that Russia’s government is by the rich and for the rich. Though perhaps at first necessary as the most reliable way for a broken state to combat tax evasion, the 13% flat tax on incomes now perpetuates inequalities. A much bigger burden falls on productive companies in the form of (highly regressive) social security contributions, which are set to rise from 26% to 34% of the first 400,000 rubles of income this year to help correct the budget deficit. However, Putin had no problems with reducing taxes for oil companies, so that they could either extract and sell off Russia’s oil the faster, or pocket the extra change.

Worst of all are the effects on social cohesion. All Russian oligarchs earned their wealth through their connections with the state – there is not a single Sergei Brin or Bill Gates amongst them. The inheritance tax was abolished in 2006, and now more than a hundred Russian children, or “little adults“, are set to acquire billions without earning a single ruble. Sure, these “new Russians” get to experience the shallow thrills of conspicuous consumption, and take power in their sleazy connections with state structures to run over ordinary Russians with impunity (sometimes literally). The price Russia pays for tolerating these historyless elites is a perpetual bankruptcy of social capital, the cooperative spirit that welds a nation together. Amongst other things, this dearth of social capital manifests itself in society’s tolerance for petty corruption. After all, why should a simple traffic policeman, doctor, or other low-paid state worker refrain from taking bribes, when oligarchs make off with billions in cahoots with the state?

There has been no effort to check or reverse the growth of inequality under either Putin or Medvedev. Even as the Fair Russia opposition party calls for progressive taxation and a luxury tax, Roman Abramovich is indulging himself to his biggest yacht so far, armed with a missile defense system and laser shield.

Strike 3 – Putin presided over an increase in inequality, made all the more unholy by money’s marriage with socio-political privilege. Though neither the trend towards nor the magnitude of inequality is exceptional by global standards, it clashes with Russian popular sentiments and undermines social capital.

4. Economic mismanagement, or stationary bandits who don’t know or care about limits to growth.

First, the “Muscovite” rent-granting political economy over which Putin presided is both economically inefficient and socially unjust. Take the Russian oil industry, in which politically subservient oiligarchs are given free rein to manage their own companies. This combines the worst of both private and state ownership. Lacking security over their assets, the oiligarchs are loath to plow too much of their own money into maximizing long-term oil extraction and revenue. Far better to maximize short-term extraction by overexploiting their oil fields, pleasing the Tsar with generous rent payments, and to make off once these fields go into premature decline. In the meantime, astronomical profits are diverted into a few oiligarch hands instead of going to the Russian state. Now granted, Putin’s “purgatory”, run by clans of “stationary bandits”, might be an improvement over Yeltsin’s “hell” of asset-stripping “roving bandits”… but they are all still bandits nonetheless.

Yet when all is said and done, it is not entirely clear that Putin could have realistically done better on any of these issues. He inherited the “Muscovite system” from Yeltsin and can be credited with actually making it workable, in the sense that the oligarchs were forced into paying their taxes and Russia’s chronic budget deficits were finally eradicated. Reversing privatization and trying to create a Russian version of Statoil, the efficient state-owned Norwegian energy company, was entirely unrealistic given the institutional rot of the Russian state. The other extreme, a full-scale liberalization of the oil sector, would have probably been counter-productive because of that same weakness of the Russian state. For proof, look no further than how Khodorkovsky used YUKOS’ resource wealth to mount a direct political challenge to the Kremlin… would the Russian people really have been well served if their state had been hijacked by the Menatep bandits?

Second, even accounting for its being a cold, landlocked country with a lot of heavy industry, Russia remains very energy inefficient. There are serious uncertainties over its ability to meet future domestic and European gas demand, and its oil production will soon peak and go into decline. However, by world standards, Russia is supremely well-endowed with energy resources. Thus, it makes manifest sense to use the earnings from foreign hydrocarbons sales to aggressively implement energy efficiency measures and build a green energy infrastructure. The World Bank estimates that investing 320bn $ into energy efficiency could save Russian consumers 80bn $ and generate more than 100bn $ in extra export revenues annually. Putin prefers to go the much more expensive route of greatly expanding generating capacity, e.g. by building many nuclear power plants, while less glamorous but cheaper options like insulating housing, upgrading utilities, or reducing natural gas flaring are neglected. So yes, Russia’s policies on energy are short-termist and “cornucopian”, – but the very same could be said for almost any country one cares to name. Only a bare handful of nations, like Sweden or Germany, have made serious commitments to sustainable development (and none acknowledge the concept of Limits to Growth).

Third, the main reason Russia experienced such a deep recession during the 2009 global financial crisis was because its banks and corporations had become dependent on infusions of Western credit. Once this system throttled up in late 2008, emerging markets were the first to be cut off. Unfortunately, Russia under Putin’s watch had failed to develop the deep indigenous credit systems that enabled countries like Brazil or China to weather the storm in good shape, and it saw a massive GDP decline of 7.9% in 2009. But it’s not exactly clear how Russia could have prepared better. The main reason Russia’s financial system was starved of capital was because instead of reinvesting the proceeds from hydrocarbon sales into the economy, the government bought up foreign currency reserves in order to prevent an excessive ruble strengthening from short-circuiting the revival of Russia’s manufacturing base. Ironically, by trying to reduce its resource dependency, Russia actually increased its exposure to the Western financial system, whose weaknesses only became obvious with the benefit of hindsight. Nonetheless, despite the severity of the GDP drop in 2009, the Russian economy is now showing signs of mounting a vigorous recovery.

Finally, Putin should be given big props for protecting Kudrin – the main architect of Russia’s macroeconomic stability – from the attacks of the spendthrifts and siloviki in his circle. This did nothing to benefit him politically, but as a result Russia today is “one of the world’s most fiscally secure nations”, according to Liam Halligan, chief economist with Prosperity Capital Management.

Strike 4 – under Putin, Russia remained economically unproductive, socially unjust, energy inefficient, and acquired a dependence on Western credit. These problems are deep and are unlikely to go away without intelligent intervention by the state.

5. White elephants, or Siberian bridges to nowhere.

The Russian state has always liked “white elephant” solutions to complicated problems. Putin continued in this proud tradition. Perhaps the best example of this were Russia’s wild-eyed plans to construct six aircraft carriers during the giddy heights of its pre-crisis boom. Let’s look at the problems with this scheme:

  1. The global hegemony of the United States rests on the power projection capabilities of its 11 aircraft carrier battle groups. Russia is a regional land power whose strategic interests do not extend far beyond its Near Abroad.
  2. Russia’s economic base is seven times smaller than America’s.
  3. Even the “structurally militarized” USSR never had much success with aircraft carriers. Russia’s military-industrial complex is now almost an order of magnitude smaller and no longer has access to the big drydocks in Ukraine.
  4. Russia can’t even build a decent helicopter carrier, and eventually took the rational decision to order Mistrals from France.
  5. The days of the aircraft carrier may well be numbered due to the development of cheap carrier-killing weapons systems.

This particular white elephant never was to be. But far too many are real enough, such as the bridge to nowhere near Vladivostok that will connect the Russian mainland to a small island populated by a few thousand residents, projected to cost more than 1bn $ and intended as a showpiece for the 2012 APEC summit. Meanwhile, the roads from the Urals to Vladivostok remain little more than dirt tracks.

Now admittedly, white elephants are minor nuisances relative to the first four problems. Their attractions are hardly unique to Russia, and it could even be argued that some, like the Sochi Olympics, are a net positive thanks to their impact on national morale. Nonetheless, I still think improving Russia’s energy efficiency or networking its clunky armed forces is somewhat more important than erecting suspension bridges in Siberia or dreaming about multiple carrier battle groups patrolling the Russian Arctic.

Strike 5 – Putin is sometimes too influenced by the traditions of Soviet gigantism to consider humbler, more cost-effective ways of solving problems.

What Putin did right

But what about that KGB spy’s ruthless suppression of freedom and democracy? False narrative. The majority of Russians approve of Putin and his system – as of 2008, some 75% of Russians felt that they either had “enough” or even “too much” freedom. Today’s Russians feel much happier and freer than in either the late Soviet Union or Yeltsin’s Russia.

But hasn’t Putin suppressed the free media and brainwashed Russians into worshipping him? Yet if that were the case, one would presumably expect most Putinistas to be old, sour-mouthed Stalinists, whereas in fact support for Putin (and disillusionment with the West) is highest amongst young, university-educated Muscovite men – the very segment of the Russian population that is most exposed to the West through the Internet and foreign travel! (Of course, to the Western chauvinist, this must mean that the Russian people are ignorant, nationalist sheeple… since nothing can be allowed to challenge their faith, there is little point in talking to them).

What about Putin’s hatred of the West? Again, false narrative. Putin the KGB operative is inseparable from the Putin who served under Sobchak, the liberal mayor of St.-Petersburg in the 1990′s, or the Putin who favored the “civiliki” clan (Surkov, Medvedev, “patriotic liberals”) over the FSB-connected “siloviki” in his choice of successor. But why then does Putin antagonize America by maintaining relations with freedom-haters like Ahmadinejad and Chavez? Newsflash! This is Realpolitik, practiced by all sane and sovereign nations. Bending over backwards to advance Washington’s national security interests is not part of Putin’s job description. Not can it reasonably be expected, due to US support for states hostile to Russia (e.g. Georgia) in its Near Abroad.

One of Putin’s greatest strengths is that he recognizes the immense harm Russia suffered from single-minded past pursuits of abstract ideals, and rejects mindless idolization of the West as surely as he rejects the old Marxist-Leninist dogmas. He is a national figure of post-ideological reconciliation, a leader who sees no paradox in defending the Soviet Union against politicized attempts to equate it with Nazi Germany while honoring Russians like the dissident Aleksandr Solzhenitsyn or the White general Anton Denikin.

Zhou Enlai may have been exaggerating when he said the impact of the French Revolution was “too early to tell”, but nonetheless, I think it is fair to say that we must wait at least a few decades before we have any hope of objectively determining Putin’s legacy. Based on the criticisms I’ve made in this post, some analysts would rush to dismiss Putin as an incompetent idiot or malicious enemy of the Russian people. After all, it doesn’t take much to pronounce judgment from the comforts of one’s armchair… Yet none of us have been in Putin’s boots. We didn’t experience his early struggles with the oligarchs, the contraints and frustrations he faced trying to rule Russia through an unwieldy and corrupt bureaucracy, the pyramid of cards he has to build and maintain to balance the warring Kremlin clans. I can do no better than quote a great speech by Theodore Roosevelt to illustrate this point:

It is not the critic who counts: not the man who points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming, but who knows the great enthusiasms, the great devotions, who spends himself for a worthy cause; who, at the best, knows, in the end, the triumph of high achievement, and who, at the worst, if he fails, at least he fails while daring greatly, so that his place shall never be with those cold and timid souls who knew neither victory nor defeat.

Putin’s critics, knowing neither victory nor defeat, are nothing more than the dust at the feet of that great man who continues struggling, striving, and spending himself as Russia’s humble servant.

* To the best of my knowledge, all these allegations of Putin’s 40bn $ of personal wealth originate from Stanislav Belkovsky, a professional purveyor of kompromat and creature of Sechin’s silovik clan.

** Georgia’s success at controlling corruption shouldn’t be exaggerated. In recent years, the Saakashvili regime acquired the habit of pressuring independent businesses to provide “voluntary contributions” in return for not bankrupting them under corruption prosecutions.

*** Russia’s corruption should be viewed in perspective. Is it a serious problem that reinforces privelege and blights the lives of many people? Certainly. Apocalyptic? Not at all. First, Russia is not excessively corrupt by the standards of most middle-income countries, and there is evidence that “everyday” corruption (as opposed to business corruption) fell under Putin’s watch. See here, here, and here. Second, corruption does not seriously affect Russia’s growth potential. Italy was systematically corrupt in the 1970′s-80′s (and still is), as exposed in the short-lived mani pulite investigatations of the early 1990′s. But that did not stop Italy from overtaking Britain’s GDP back in 1987 in the so-called “Il Sorpasso”. Likewise, Russia’s myriad strengths – the strong education system, energy wealth, and macroeconomic stability – means that its systematic corruption is unlikely to constitute an insurmountable barrier against its convergence to Western levels of development.

**** Russia’s levels of inequality shouldn’t be exaggerated, however. The Gini index of income inequality has been stable at around 40 since the early 1990′s, and is only high by European standards. (The US and China are at 45, most Latin American countries exceed 50).

(Republished from Sublime Oblivion by permission of author or representative)
 
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After two hundred years of global ascendancy, the West is in rapid relative decline to (re)emerging Asia, which is mounting a steady “Great Reconvergence”. Likewise, the legitimacy of today’s “neoliberal internationalist” order promoted by the West is being questioned by the more statist, neo-Westphalian visions of the leaders of the Rest, the so-called BRIC’s. This has already led to the emergence of a “world without the West” – a parallel international system based on the principles of state sovereignty, hard power, and bilateral trade relations.

The most powerful and influential member of this new world is China, which has become the “workshop of the world” since its graduated opening up from the late 1970′s. Accounting for half of global steel and cement production, China has built up an enormous infrastructure of roads, railways, and ports to support its mercantile expansion. In 2009 it became the world’s largest automobile market. Furthermore, China is now advancing higher up the ladder of added-value industries by expanding into hi-tech areas such as commercial aircraft, renewable energy, and supercomputers.

One of the most important factor making China’s rise all the more significant is that it is concurrent with the accelerating decline of Pax Americana that is spurred on by the end of cheap oil, US economic weakness, and regional threats to American hegemony from the “challenger Powers” (e.g. Russia, Iran, and China itself). Should the current international order suffer a “cascading collapse” – which is not unlikely, given the brittleness of the world financial and energy system – then it is possible that China will emerge as an equal, or even superior, pole to the US superpower as soon as 2020.

The Inevitability of China’s Return to Hegemony

Critics aver that ordinary Chinese remain much poorer than Americans, but they miss the obvious fact that with its 1.3bn+ population, China needs only a Romanian level of per capita economic output to equal the US; should they reach Portugal’s level, China’s economy would be double America’s size. (Economic power underpins military power). Nor is there any reason for supposing that China’s growth will soon falter due to social and regional inequality, environmental degradation, bad loans, population aging, or social unrest (though it may well experience a Malthusian collapse along with the rest of the world by 2050). For a refutation of the major concerns, see my old post A Long Wait at the Gate of Delusions, or in summary:

  1. Regional disparities. The sharp divide between the affluent coastal and poorer internal regions is not new in Chinese history. In the absence of firm central control, this has in the past led to fragmentation – coastal administrations orientating themselves to foreign commercial interests, the interior sinking beneath a morass of poverty and corruption. However, modern China is not the ailing China of the 19th century in the throes of Malthusian stagnation. It is now a proud and rising Great Power, its regional separatist movements are quelled, and it is under the firm control of the CCP. As such, the chances of a jaded Japan or declining USA successfully exploiting this divide are very slim.
  2. Income inequality. There is also a great deal of inequality between China’s urban and rural, between its new oligarchs and itinerant indigents, and between the privileged and non-privileged. However, this is entirely typical of capitalist societies at the height of the industrialization drive, and levels of inequality tend to fall once a more affluent state decides on expanding social welfare schemes to contain labor unrest. As will be covered in a later, related post on China’s internal debates, the ideological underpinnings for such a shift are already coming into place with the concept of the “Harmonious Society“.
  3. Environmental degradation. A major problem. An innovative attempt to start measuring economic performance with “Green GDP” (accounting for pollution costs) was quietly squashed when it indicated that China had almost no real growth. That said, localized pollution per se, like city smog or collapsed ecosystems, won’t bring about China’s fall just as they haven’t led to the fall of any other post-agrarian society. The same certainly cannot be said for anthropogenic climate change, whose effects will become devastating to China by the 2030′s (floods, droughts, desertification, dust storms, etc). The most ominous prospect is the melting of the Himalayan glaciers, though some point out that this may be a centuries-long process. Nonetheless, these potential disasters won’t come in time to prevent China’s assumption of its superpower mantle, which I predict for 2020.
  4. Bad loans. A valid point, but they only tend to result in – or more accurately, contribute to – long-term stagnation by the time high growth rates falters, such as when a developing society nears convergency with the rich world (e.g. Japan in the early 1990′s). South Korea got a severe economic shock in 1997 stemming from its structural weaknesses, but respectable rates of growth continued up until the 2008 economic crisis. Speaking of which, Western critics should be doubly cautious now when criticizing China for its bad loans. As recent history might have proven, investing in industrial overcapacity may be rather less useless than building suburbs with no future, printing money under euphemisms like quantitative easing, or whatever the latest bondoogles are.
  5. Will China get old before it gets rich? The concerns over aging are ridiculous because 1) China’s TFR is at a respectable 1.8 (OK, more like 1.6-1.7 if one accounts for their skewed sex ratios, but still…), 2) its labor force will continue growing until 2030, and 3) it still has massive labor armies locked up in the countryside which can be drawn into higher-added value economic sectors. The real problem cases in the aging department are Central Europe, the Mediterranean, and Japan. See Will China Grow Old Before Getting Rich? (Goldman Sachs) for a more comprehensive analysis which reaches the same basic conclusion.
  6. Excessive export dependency. Frankly, I’ve always thought the image of the heroic American consumer saving the world by kindly consuming much of what the the world produces to be somewhat ridiculous – and this image is already being revealed for the hallucination it really is, thanks largely to US fiscal profligacy, imperial overstretch and peak oil. But I digress. First, China’s export dependency is nowhere near as high as suggested by the official figures because much of its exports are merely assembled in China from parts made in and imported from Korea, Japan, etc. Whereas gross exports are near 40% of GDP, net exports are at just 7% of GDP. In 2008, China clocked up a respectable 8% GDP growth rate (albeit, one only enabled by prodigious credit infusions), even though its exports fell by 20%. Second, the main reason for Chimerica – Chinese saving / production – American dissaving / consumption – in the first place was it allowed China to acquire the foreign currency to pay for resource imports, build up its industrial base, and acquire advanced technologies, while the US got back cheaper goods to cushion its rising inequality and industrial stagnation. But China interest in this deal is flagging. It already has by far the world’s largest industrial base by volume and it has bought up, or stolen, most of the key technologies needed for advanced industrialism. From now on, growth will be slower as it is curbed by stagnant world demand, accumulating bad loans, diminishing returns, etc, – it will likely be around 5-7% a year in the 2010′s, rather than the 10% typical of the 1980′s to 2000′s. Nonetheless, growth should continue at a fast enough rate to soak up the new landless labor, ease social tensions and enable China to launch a geopolitical breakout. The inevitable transition from a centrally-weak, disbalanced and commercialized nation-state, to a more centralized, balanced, hegemonic empire will not be smooth, but China’s forward momentum is simply too large to derail its rise to superpower status.
  7. Social unrest. Unlikely to happen in a big way as long as fast economic growth continues, which it likely will for the next decade. China still has plenty of room for economic convergence, and its investments in human capital are going to be paying off handsomely in this period – “during the past decade, China has produced college and university graduates at a significantly faster pace than Korea and Japan did during their fastest-growing periods” (Goldman Sachs). Nor are resource or ecological limits to growth likely to intrude in the next ten years. Of course, this situation won’t last forever and by 2030 at the latest, China will be forced to radically reform its model to hold together, e.g. to nationalist expansionism or ecotechnic dictatorship.
  8. China’s monolithic and non-democratic nature. Though the CCP projects an image of internal unity on the world, under its placid exterior there is a flux of dynamic debates about how China should reconcile growth with environmentalism, capitalism with socialism, democracy with stability, and cultural influence with military strength. The necessity of liberal democracy for success is a figment of the Western end-of-history mentality, and will be recognized as such by the time the West realizes history doesn’t end.

In conclusion, China has the tools at its disposal to become the world’s last industrial superpower (the US and Japan are in relative decline, Russia has too few people, India is coming to the party too late). The creeping dissipation of the global financial system will remove the US from its position as the system’s intermediator, and with it will go a key pillar of neoliberal internationalism. This will clear the foundations for the emergence of a new symbiosis between the oil-exporting nations of the Middle East and a China which can provide them with cheap consumer goods and security guarantees in place of a deindustrialized, unpopular, and increasingly insular America. These trends will become the conventional wisdom by 2020.

China and the World: Coal, CO2, and Geopolitics

By that date, the age of scarcity industrialism will be in full bloom. Three issues will come to the forefront of all discussions about China’s global significance.

First, the impact of 1.3bn people enjoying rising levels of personal affluence on the global environment. Its electricity generation fueled almost entirely by coal, China has recently overtaken the US to become the world’s biggest CO2 emitter. Today, given the absence of any egalitarian, spiritual, or ultra-nationalist ideology keeping the country together, China requires rapid growth to prevent spiraling unemployment and social unrest. The CCP wants to remain in power, and for that it needs stability, and that needs growth, and that needs more and more coal plants every year. Hence the reason for China’s unwillingness to agree to any but the weakest CO2 emissions targets – i.e., a non-binding resolution to a 45% reduction in Co2 intensity per unit of GDP by 2020 from the levels of 2005. However, since China’s GDP is expected to treble or even quadruple from 2005 to 2020, its emissions will grow by 50-100% even if it achieves this non-binding target. Needless to say, this will be catastrophic for our efforts to contain climate change to a global temperature rise of below 2C, at which point runaway dynamics are expected to become predominant. As the last superpower, I expect China to take the lead in any global or national “final gambit” at geoengineering our way out of runaway climate change.

Second, China’s ability to generate industrial growth from its own resources is shrinking. It is already a major oil importer and its grain production is on a slowly dipping plateau, thanks to increasing urbanization and environmental damage (desertification, salination, depletion of fossil aquifers, etc). It is already restricting exports of the strategic Rare Earth Metals that constitute key components of hi-tech devices such as hard drives, wind turbines, and electric cars. This is a major problem for the world outside China, since China accounts for a stunning 95% of global REM production. It will take a decade to reopen the old mines, and in the interval the West could experience a severe “tech crunch”.

Since the bulk of Chinese electricity consumption comes from coal and its geo-economy is not structurally dependent on cheap oil on the same massive scale as the US, China will not be as hard hit by peak oil as the Anglo-Saxon world; besides, its manufacturing prowess and foreign currency reserves will allow it to outbid most competitors for the black gold. However, the downside to using coal is that it too will peak – in China’s case, perhaps within 10 to 15 years, after which it will go into a rapid decline. As such, China can be expected to “lock in” foreign energy supplies with long-term contracts, increase exploitation of unconventional fossil fuel sources such as coal seam gas, and accelerate its current attempts to force through a renewable transition. In 2009, China became the world’s largest producer of both wind turbines and PV panels; however, they have made nary a dent in its CO2 emissions, and are unlikely to do so any time soon. Coal is much cheaper and more importantly, provides the vital base load power that intermittent wind and solar flows cannot.

Third, China’s military power and neo-colonial influence is set to increase in the coming decades. After suppressing military spending from the late 1970′s to the early 2000′s in order to free up its energies for rapid economic growth, the People’s Liberation Army is now being paid back handsomely for its patience. A prescient quotation from the Economist in 1986, from the days when the magazine was still worth reading:

For China’s military men with the patience to see the economic reforms through, there is a payoff. If Mr. Deng’s plans for the economy as a whole are allowed to run their course, and the value of China’s output quadruples, as planned, between 1980 and 2000 (admittedly big ifs), then 10 to 15 years down the line the civilian economy should have picked up enough steam to haul the military sector along more rapidly. That is when China’s army, its neighbors and the big powers will really have something to think about.

That time is now. Defense spending is now rising faster than GDP, as China intensifies military modernization and acquires new capabilities in electronic, information, and anti-satellite warfare. The overall strategic balance has also changed. The dissolution of the Soviet Union meant that the old Chinese fear of a tank invasion from the north has dissipated; coupled with the growing importance of maritime trade and foreign energy supplies, this has produced a reorientation to coastal defense and broader power projection to the south and east. China’s most ambitious military project is its decision to embark on the construction of a real blue-water navy, a vital tool in the renewed “gunboat diplomacy” we are likely to see in the years ahead.

In the short term, this has extended to China acquiring Russian weapons such as four Sovremenny-class guided missile destroyers, twelve Kilo-class diesel-electric submarines, and advanced anti-ship missiles and supercavitating torpedoes such as the Sunburn, Sizzler, and Shkval. Domestic production of naval vessels is expanding rapidly: whereas US shipbuilding is withering away, China now accounts for a third of global shipbuilding and “is in the midst of a shipbuilding and acquisition craze that will result in the People’s Liberation Army Navy having more ships than the U.S. Navy sometime in the next decade”, including four aircraft carriers by 2020. China’s military modernization has already tipped the regional balance of power. A recent RAND study indicates that China is already be able to establish air superiority over Taiwan in the event of a hot war over the straits, and on current trends it will probably be able to conquer it outright within the decade.

In tandem with its military modernization, which is mostly geared to fighting and winning possible local wars in south-east Asia (Taiwan, Spratly Islands, Vietnam), China is pursuing a far-sighted “string of pearls” strategy of naval base construction on its outlying coastal islands and friendly nations such as Myanmar, Sri Lanka, Bangladesh, and Pakistan. They will host radar stations and anti-ship batteries, and will form logistics hubs for naval operations. The underlying strategy is to reinforce China’s coast against foreign encroachment and to protect its sea lines of communication (SLOC) – especially the vital energy routes supplying it with Middle East oil.

Finally, the broadest form of China’s projection of influence is its rush to buy out mines, arable land, oil field concessions, and foreign national elites, from Australia to Brazil to Ukraine to Angola; indeed, Africa is a focal point of interest, with up to half a million Chinese already working on building up the continent’s industrial infrastructure and tapping its energy and mineral wealth. Closer to home in South-East Asia, most nations are both appreciative and fearful of China’s rise, bandwagoning with the US on security while engaging with China economically. The fact of America’s accelerating decline means that this state of affairs is not permanent. Any future “downsized” US empire will have minimal interests in East Asia, and will concentrate its energies on the Americas, Africa, and perhaps the Middle East (though it will be largely displaced by Turkey and China there).

The second greatest East Asian Power, Japan, will have neither the will to mount a serious challenge to China’s emerging hegemony, nor the strategic foundations. Japan is almost entirely reliant on foreign supplies of energy, and as soon as the PLA Navy surpasses the Japan Maritime Self-Defense Force, it will be utterly eclipsed by China. Why struggle, when Japan can instead exist as in a comfortable symbiosis with a China whose post-1978 growth it actively nourished – spats over their wartime history to the contrary? Japan is capital-rich, China is labor-rich; both share Asian values based on paternalism, state capitalism, and national sovereignty… Japan has two choices. It can try to construct an encircling alliance encompassing Russia, Korea, India, and the US to contain China, but this is a truly ambitious undertaking because 1) Russia has – and by that point the US will have – no overriding reason to confront China, 2) the “pan-Asian” appeal of China, 3) Japan has territorial disputes with Russia, whereas Russia in turn has close if suspicious relations with China through the SCO, and 4) as argued by the late Samuel Huntington, Asian societies have a tendency to bandwagon with the leading regional power – now it’s the US, in the future it will be China. The other alternative, and I would argue the likelier and more natural one, is for Japan to acknowledge Chinese regional hegemony. Once Japan takes this plunge, every other nation in in the region will follow.

Conclusion

It is no exaggeration to say that whither goes China goes the world. It is already the world’s greatest industrial power, at least as measured by physical throughput, energy consumption, and pollution emissions. Though still technologically backward, it is much less so than 10 years ago. China’s purchases of foreign technology, copying, and industrial espionage are rapidly closing the gap, and China’s rapidly expanding R&D workforce will be able to successfully hit the ground running once there arises the need for indigenous innovation.

The extent to which China will be able to solve its energy, minerals, food, and water problems will have major impacts domestic and international, and its success or lack of at reducing – or mitigating – its greenhouse gas emissions, is probably going to determine whether the world as a whole will be able to wriggle out of its Limits to Growth predicament. Finally, China’s cultural, economic, and neo-colonial influence is going to metastasize – in the process transforming it into an East Asian regional hegemon and primary pole in world geopolitics.

China’s greatest challenges lie in geopolitics (how to manage its own rise?), coal (how to power growth?), and CO2 (how to grow, or just stay still, sustainably?). The answers to these questions will determine its future political, social, and economic trajectory. It is therefore vital to to find out how its elites are planning to stand up to this panoply of perils and opportunities, which will be the subject of my next post on China.

(Republished from Sublime Oblivion by permission of author or representative)
 
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Chang, Ha-JoonKicking Away the Ladder: Development Strategy in Historical Perspective (2002)
Category: economy; history; industrial policy; Rating: 5/5
Summary: Kicking Away the Ladder:How the Economic and Intellectual Histories of Capitalism Have Been Re-Written to Justify Neo-Liberal Capitalism (Ha-Joon Chang)

Much has been said of the smug arrogance, cultural aloofness and end-of-history conceit characterizing the neoliberal Washington Consensus, the philosophy that a one-size-fits-all set of “good policies” (e.g. privatization, liberalization, deregulation) and “good institutions” (e.g. patent and IP protection system, etc) can – and must – be transplanted onto any country, irrespective of its historical or cultural traditions, if it were to ever join the developed “international community’. The general bankruptcy of this approach is evident from the facts on the growth, with global GDP growth during the 1960-1980 period of “bad policies” substantially higher than during the “good policies” 1980-2000 period. After seeing high growth during the earlier period, Latin America stagnated, and Africa and Eastern Europe declined during the latter; the major exception was mercantilist China.

Though always disabused by reality, from 1998 Russia to the 2008 crisis, the neoliberals retain their intellectual underpinnings by continuing to claim, like Marxists, that history itself is ultimately on their side – after all, did not Britain and the United States, the world’s greatest economic successes, rise to global preeminence through the virtues of minimal government and free trade? Not at all, argues Ha-Joon Chang in this excellent book.

Britain: From Mercantile Struggle to Kicking Away the Ladder

Take the example of Britain, alleged to be the historical laissez-faire state par excellence, in stark contrast to the stultifying dirigisme of Colbertist France. This is actually an inversion of the truth, for the French state was generally laissez-faire and backward-looking in the period between the end of Napoleon’s Continental System and the post-WW2 years (after which the state began large-scale interventions in the French economy, which experienced burgeoning growth that saw it overtake Britain’s GDP by the 1970′s). On the other hand, Britain was highly protectionist up until it established and cemented its global industrial predominance by the middle of the 19th century.

British protectionism has a long history, stretching back to medieval import substitution designed to foster an indigenous wool manufacturing industry, instead of being reliant on raw wool exports to Europe. Henry VII tried to change this by taxing raw wool exports and poaching skilled workers from the Low Countries. This kick-started the industry that would come to constitute the key element of British industrial supremacy in the 19th C.

In 1721, Walpole expanded on previous Navigation Acts to encompass mercantile measures like lower tariffs on raw materials imports, duty drawbacks on the imported raw materials used for exports, the removal of export duties, the raising of duties in imported manufactures, export subsidies and a system of quality control to maintain the reputation of British exports. The colonies were treated as captive markets and resource appendages to fuel the commerce and industry of the mother country, by measures such as the 1700 ban on (better-quality) Indian calicos, which (possibly) stifled an incipient Indian industrialization. Britain fine-tuned the terms of trade between the US colonies itself to discourage industrialization in the latter, even resorting to overt illiberal measures like outlawing rolling and slitting steel mills on the American continent.

This is how Friedrich List, a leading economist of the German Historical School, described Britain’s rise to industrial dominance in his The National System of Political Economy in 1841:

Having attained to a certain grade of development by means of free trade, the great monarchies [of Britain] perceived that the higher degree of civilization, power, and wealth can only be attained by a combination of manufactures and commerce with agriculture. They perceived that their newly established native manufactures could never hope to succeed in free competition with the old and long-established manufactures of foreigners… Hence they sought, by a system of restrictions, privileges, and encouragements, to transplant on to their native soil the wealth, the talents, and the spirit of enterprise of foreigners. …

It is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he climbed up, in order to deprive others of the means of climbing up after him. In this lies the secret of the cosmopolitical doctrine of Adam Smith, and of the cosmopolitical tendencies of his great contemporary William Pitt, and of all his successors in the British Government administrations.

Any nation which by means of protective duties and restrictions on navigation has raised her manufacturing power and her navigation to such a degree of development than no other nation can sustain free competition with her, can do nothing wiser than to throw away these ladders of her greatness, to preach to other nations the benefits of free trade, and to declare in penitent tones that she ha hitherto wandered in the paths of error, and has now for the first time succeeded in discovering the truth.

Even the 1846 repeal of the Corn Laws protecting domestic agriculture were justified by its British supporters on protectionist terms, e.g. Robert Cobden of the Board of Trade:

The factory system would, in all probability, not have taken place in America and Germany. It most certainly could not have flourished, as it has done, both in these states, and in France, Belgium, and Switzerland, through the fostering bounties which the high-priced food of the British artisan has offered to the cheaper fed manufacturer of those countries.

It was only in 1860, by which time Britain’s status as the workshop of the world was unquestioned, that it truly transitioned to a free-trade regime with the Cobden-Chevalier Treaty with France. Yet during the next fifty years it was undermined by German technological prowess and American economies of scale, and was obliged to reintroduce substantial tariffs in 1932 under the stress of the Depression-era protectionism scramble.

[International tariff rates 1820-1950, taken from Google Books].

The Protectionist Roots of Pax Americana

What about the US, then, today’s champion of free trade? This is an ironic position for it to take up, given that in the years after the Civil War and prior to the Second World War, America was the protectionist nation par excellence.

The “infant industry” theory was invented by Alexander Hamilton, the first Treasury Secretary, and the American economist Daniel Raymond. With its history of being held as a resource appendage and captive market by the British and spurred on by the War of 1812, protectionism was firmly established from 1816. A US Congressman, a contemporary of Friedrich List, said of British liberal trade theory, “like most English manufactured goods, [it] is intended for export, not for consumption at home”. President Ulysses Grant, a Civil War hero, remarked of it, “within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade”. So the populist right-wing politician Pat Buchanan makes a perfectly valid point when he condemns free trade as being un-American.

Ha-Joon Chang stresses the importance disputes over the proper level of tariffs played over the start of the US Civil War. The crux of the matter was that northern industrial interests wanted high tariffs to protect themselves from British competition, whereas the South, which had no industries of its own and an idle, rapacious elite, wanted lower tariffs to make British goods more affordable. There were frequent spats on this matter from the 1830′s; slavery only provided the fuse. (Chang points out that Lincoln was deeply racist by modern standards and only emancipated the northern slaves in 1862 as a strategic move against the South). Lincoln’s top economic advisor, Henry Carey (described by Marx as the only American economist of any significance), argued that British free trade was an imperialist ploy to consign the US to a future of primary production.

Following the North’s political and military triumph, US tariffs between the Civil War and World War Two remained the highest amongst those of any industrial power, with the sole exception of Russia. As with its British imperial predecessor, the American superpower only ditched free trade once it achieved a global industrial dominance made possible by the wartime devastation of its European competitors. Though tariff rates are now very low, the US somewhat compensates with voluntary export constraints, (textiles) quotas, agricultural subsidies, and unilateral sanctions against countries suspected of dumping, so it remains far more protected than Britain was during the Victorian Golden Age of globalization. Likewise there is extensive state support for R&D, which enabled US success in hi-tech areas like computers, the Internet, aerospace, and biotech.

State Intervention Critical to Economic Sovereignty

The vast majority of other now-developed countries (NDCs) also employed extensive protectionism and state intervention during their periods of successful economic convergence. Though Germany eschewed the kind of “blanket protectionism” used in mercantile Britain and the pre-superpower US, the state was far more active in promoting modern technology, industrial espionage, technological “demonstrations”, teaching science at its world-class universities, and pioneering social welfare by the late 19th C to defuse social tensions. Though Japan was actually forbidden from raising its tariff rates above 5% in the first decades following the Meiji Restoration, it compensated by investing heavily in infrastructure, education, and the acquisition of foreign technologies and institutions. Sweden had high tariff rates (especially in the early 20th C), an unrivaled record in public-private cooperation, and “strategically used tariffs, subsidies, cartels, and state support for R&D to develop key industries, especially textile, steel, and engineering”. It also preserved social harmony through the Saltsjöbaden agreements of 1936, in which labor committed to restraining wage demands in return for the employers committing to building one of the world’s most comprehensive welfare states. As for some of the smaller nations:

There were some exceptions like the Netherlands and Switzerland that have maintained free trade since the late 18th century. However, these were countries that were already on the frontier of technological development by the 18th centuries and therefore did not need much protection. Also, it should be noted that the Netherlands deployed an impressive range of interventionist measures up till the 17th century in order to build up its maritime and commercial supremacy. Moreover, Switzerland did not have a patent law until 1907, flying directly against the emphasis that today’s orthodoxy puts on the protection of intellectual property rights (see below). More interestingly, the Netherlands abolished its 1817 patent law in 1869 on the ground that patents are politically-created monopolies inconsistent with its free-market principles – a position that seems to elude most of today’s free-market economists – and did not introduce another patent law until 1912.

Contrary to the conventional wisdom, it was the open economies that failed to develop rapidly. Not much chance for European colonies / captive markets to develop an indigenous industrial base under the constant, unchecked pressure of superior European competition. Semi-independent countries like China and the Ottoman Empire were paralyzed by “unequal treaties” capping tariffs at a 5% flat rate and loss of tariff autonomy (Ha-Joon Chang points out that today the World Bank recommends a maximum 15-25% tariff rate, low and uniform, despite that the development differential between today’s poor and rich countries are vastly greater than they were a century ago). Finally, industrial leader nations (like Britain) tried to stymie the growth of competitors by preventing the outflow of skilled workers in the 18th century, machines in the 19th century, and enforcing intellectual property rights in the 20th century.

Institutions aren’t Everything

The author also points out that institutions today are far better in the developing world today, in most cases, than of NCDs at an an equivalent stage of development. For instance, despite the fact that Britain in 1820 had a similar level of development to India in 2000:

[Britain] did not have universal suffrage (it did not even have universal male suffrage), a central bank, income tax, generalised limited liability, a generalised bankruptcy law, a professional bureaucracy, meaningful securities regulations, and even minimal labour regulations (except for a couple of minimal and hardly-enforced regulations on child labour).

As such, the rich would should moderate their unrealistic demands for the developing nations to instantaneously reform their institutions to world standards. It is a difficult process that took centuries in the NDCs themselves, and besides in some cases the poor countries would be better off spending that money on other things. For instance, would it be better for Gabon to spend its (very limited) resources on hiring legions of (foreign) intellectual property lawyers to ensure a modern IP environment, or should it spend them on training its own primary school teachers? Tough choice, right?

As Tainter teaches us in The Collapse of Complex Societies, complexity isn’t always all it’s cracked up to be.

Conclusions & Lessons for the Present

The “official history” of capitalism has been highly distorted by neoliberals with little appreciation of economic history, either maliciously, or because of their ideological blinkers. The reality is that even today’s stalwarts of free trade and liberalization only got to the top though blanket protectionism and intelligent state intervention, a tradition that has been carried on by the East Asian tigers (Korea, Taiwan, etc) – the only major non-Western nations to successfully industrialize after Japan. After they had industrialized, the new leader nation – in modern times, the US – has an interest in creating a global free trade system which could reinforce its hegemony. The poachers become the gamekeepers. The climbing followers become leaders kicking away the ladder.

However, uninterrupted free trade does eventually undermine even its guarantors. Last century, it was Germany challenging Britain. Today, it is China challenging the US.

Leveraging its cheap, docile and decently-educated labor force, China used the window of opportunity thrown open by US trade policy to build up the world’s premier industrial base – as of now, it produced around half the world’s steel and cement. Though it’s economy is ostensibly relatively free-wheeling, China having ditched central planning three decades ago, in practice the state remains extremely active in building up infrastructure, improving human capital and industrial espionage. It couldn’t care less about intellectual property rights, given that it has almost none of its own to protect (you don’t need innovation when you’re at the point when you can just buy or steal the next technological levels), giving it a further competitive advantage. The sheer comparative advantage it has built up in manufacturing means that overt protectionism is simply unnecessary for it.

Open trade has led to the steady deindustrialization and “hallowing out” of the US industrial base, which no longer maintains a positive balance of trade in any manufactured goods category, with the marginal exception of (heavily-subsidized) aerospace. (The effects in some European countries have been as bad, e.g. Italy’s traditional artisanal manufacturing destroyed by cheaper Chinese competition). The US machine tool industry, the heart of any industrial ecosystem, has been decisively buried by European and Asian competition. From 1999 to 2008, US automobile production declined from 13.0mn to 8.7mn units, while in the same period this figure rose amongst its main competitors like Japan (9.9mn to 11.6mn), Germany (5.7mn to 6.0mn), Korea (2.8mn to 3.8mn), and China (1.8mn to 9.3mn).

The shifting winds of history are steadily unraveling Pax Americana‘s center of gravity, threatening to send the global system into a chaotic tailspin. The paradox is that though globalization sustained US hegemony, it also contained within it the seeds of its own destruction. America has overstayed in laissez-faire land, blinded by its own instruments of success to the dangers they pose to itself.

Russia has an exceptionally strong need for protectionism and state intervention, on account of its traditional economic backwardness, highly unfavorable geography, and innate tendencies towards illiberal anarchy (in which nothing gets done at all). Hence the reason for the forward-looking, dirigiste industrial policy pursued under the Putin administration (special economic zones, clauses obligating foreign automobile companies to source a percentage of their parts from Russian suppliers, nanotechnology, etc) – and the likelihood that the state will resume its old rule as the main driver of the Russian economy in the unstable decades to come.

A few criticisms of the book. It makes the blanket statement that growth was higher during the “statist” 1960-1980 period than the “open” 1980-2000 period, but fails to consider other possible factors behind it, such as: a) the end of hyperbolic growth in oil extraction, and more generally, energy production (energy and natural resources are indispensable and highly-neglected factors of economic growth) – i.e. the appearance of limits to growth to the global economy, b) the ebbing of the electro-mechanical / petrochemical cycle and c) the end of the Flynn effect (end of IQ rise), especially pertinent given that education is the elixir of growth. In other words, the scope of the book is rather narrow – state industrial policy as the be all and end all of economic development. That said, his arguments are intuitive and convincing, if not fully complete; though then again, I doubt comprehensiveness would have been one of his aims in a book of just 140 pages.

(Republished from Sublime Oblivion by permission of author or representative)
 
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Scott, JohnBehind the Urals: An American Worker in Russia’s City of Steel (1941)
Category: history, Soviet Union, Stalin; Rating: 5/5

Fear and Fervor under Stalinist Industrialization

The Great Depression of the 1930’s, with its iconic images of well-dressed bourgeoisie in soup lines and gaunt figures with hopeless eyes from the Dust Bowl, challenged the prior American consensus that their system of liberal democracy and free markets was the pinnacle of social and economic organization. Upon graduating from a radical educational program at the University of Wisconsin, John Scott had few permanent job prospects. Coupled with the legacy of his family’s freethinking, non-conformist background, youthful wanderlust and socialist sympathies, he obtained a welder’s certificate at a General Electric plant at Schenectady and set out to discover Soviet civilization – Steffens’ wave of the future, Sloan’s ‘country with a plan’ and in his own pseudonym’s words, ‘the place where there is work to be done is now among the workers themselves’.

The book is a fascinating compendium of observations of Soviet proletarian life in the 1930’s from the point of view of an idealistic but objective American fellow traveler living and working in the model city of Magnitogorsk. He successfully bridged the polar Western views of the USSR of the times, which ranged from the Scylla of the right who claimed it produced nothing but ‘chaos, suffering and disorder’ to the Charybdis of the Communists who held it up as a panacea. His thoughts on this are well worth quoting in full, especially because of their resonance today:

In talking with people in France and America I was impressed by the interest in the Soviet Union and the widespread misinformation about Russia and all things Russian. Everyone I met was opinionated [aren't we all lol!]. The Communists and their sympathizers held Russia up as a panacea…Other people were steeped in Eugene Lyons’ stories and would not concede the possibility that Russia had produced anything during recent years except chaos, suffering and disorder. They dismissed the industrial and material successes of the Russians with an angry wave of the hand. Any economist or businessman should have been able to see that the tripling of pig-iron production within a decade was a serious achievement, and would necessarily have far-reaching effects on the balance of economic and therefore military power in Europe.

In this book review article, I’ll expound on some his observations and ideas, and prior assumptions and elisions, about industrialization, daily life and politics under Stalinism.

Following the economic and humanitarian disaster of ‘war communism’ during the early Civil War, the New Economic Policy was pursued in the mid 1920’s in which the state controlled the commanding heights of the economy while allowing private initiative in agriculture, light manufacturing and services below. Towards the end of the decade, however, Stalin assumed more power and used it to push the idea of ‘socialism in one country’ – the suppression of consumerism in favor of massive investments into heavy industry. Russia was ‘fifty to one hundred years behind the advanced countries’, and could either make good this gap in ten years or get crushed, as the ‘backward are always beaten’. Opponents were purged and Stalin embarked on state-backed defensive modernization (in the footsteps of Ivan IV, Peter the Great and late Tsarism); Magnitogorsk, where the iron ore deposits are so rich they distort the Earth’s magnetic field, was to be a poster child of a broader movement to build up a strategically invulnerable military-industrial complex powered by indigenous resources.

Collectivization and the lure of higher wages drew the labor power needed to build the foundations of the industrial base, while primary exports (grains, oil, lumber, etc) paid for the capital and foreign specialists. The workforce was further augmented by the economic emancipation of women (e.g. as crane operators, where dexterity had a premium over physical strength), engagement of ethnic groups (bringing Central Asians into the modern world and even attracting immigrants from Pilsudski’s Poland) and tight controls over energetic and technically skilled, but potentially politically unreliable elements like the ex-Tsarist “prisoner-specialists” and kulaks. Despite the hunger – in the early 1930’s food was rationed due to the collectivization famines, and was for the most part nutritionally and in caloric terms inadequate), persistent cold (up to -40 degrees Celsius in winter), sub-par accommodation and the poor skills of peasants suddenly turned workers (which meant that machines were used inefficiently and in ways that depreciated them rapidly), the impressive industrial plans were mostly achieved.

This was done at a high human cost – safety measures were minimal and bred a fatalist attitude, while at a more general level society suffered from consumer scarcity amidst (relative) producer plenty. The above considerations, as well as the recovery of agriculture in the wake of mechanization and electrification, eliminated shortages of basics (e.g. food stopped being rationed by the mid 1930’s) and labor rights were more honored. If anything, however, the cult of meeting and exceeding the plan metastasized, as illustrated by the emergence of the Stakhanovite movement. With technology diffusion complete and the arrival of full-scale totalitarianism by 1937, foreign specialists left and production suffered as much of the top management was purged (ironically, the NKVD turned out to be some of the best wreckers). The hysteria subsided after 1938, as the country entered a phase of further industrial development and structural militarization in response to the emergent Nazi threat.

From the Dickensian smokestacks of early industrial Britain to the smog-clogged Chinese metropolises of today, heavy industrialization was rarely benevolent to its founders. Although the sheer pace at which the Soviet Union industrialized was up till then unprecedented (e.g. pig-iron output trebled during the first two 5 Year Plans) and imposed heavy human costs, it was somewhat mitigated by the similarly unprecedented attention the regime paid to social matters. A trinity of basic sanitation, obstetrics and vaccination vastly reduced infant and epidemiological mortality in the USSR, the two prior leading causes of death (e.g. typhus was eliminated). Apartments began sprouting amidst the mud huts and wooden houses in Magnitogorsk by the mid 1930’s. Efforts were made to bring bourgeois culture like theater and ballet to the proletariatt. Nonetheless, it should be pointed out that the immediate impact on salubrity should not be overestimated – even in the late 1930’s the infant mortality rate remained close to 200 / 1000 (for comparison, the equivalent rate for the US at the time was 60 / 1000), while even by Scott’s own estimates some 75% of Magnitogorsk’s population still lived in primitive izbas or zemlyankas.

Education was subsidized and highly encouraged, focused on Marxist-Leninist ideology (to promote political orthodoxy) and on the hard sciences (to build a strong, technically advanced state). Dogma was more prevalent in the simpler technical schools, where ‘every question had a perfectly defined answer’, since that is what it said in ‘the book’, foreshadowing Milan Kundera’s observation in The Unbearable Lightness of Being that totalitarian kitsch ‘gives all answers in advance’ and pre-empts any questions. Not surprisingly, the older dogmas of religion were ridiculed (but not actively persecuted, according to Scott). Nonetheless, these efforts paid off handsomely, giving the USSR a trained workforce to operate the new machines and armaments (even today, Russia has the OECD’s highest level of tertiary educational attainment for 55-64 year olds). However, as Scott mentions, many of the most capable elements of the ancien régime emigrated and were lost to the Soviet Union, while he fully ignores – as did the Soviet authorities – some impressive achievements in literacy and school enrolment during late Tsarism, including a literacy rate of 41% by 1913 and near universal primary enrollment.

The darkest aspect of life was the activities of the NKVD, the secret police. From 1937, denunciations (made out of spite or to cover one’s mistakes) began to be acted upon for increasingly trivial reasons, which were conflated to sabotage or anti-revolutionary activities – before, these minor offences had typically resulted in fines or demotions. There were very few acquittals and only a simulation of the rule of law, but few executions, so the wisest choice was confession. Scott attributes the purges to 1) concern about sabotage on the part of embittered elements of Tsarism, e.g. kulaks and White army officers, 2) spy-mania brought forth by suspicion of the fascist and overpopulated states of Germany, Italy and Japan, which had banded together in the Anti-Comintern Pact in 1936, 3) bad memories of Allied intervention during the Civil War, 4) the Bolshevik tradition of not tolerating dissent after a decision was reached and 5) Russia’s long secret police tradition (stretching to the Tsarist Okhrana and even Ivan the Terrible’s oprichniki). Although he does not whitewash Soviet crimes, he does seek to rationalize collective punishment – perhaps somewhat implausible, as a means of helping technicians and workers ‘appreciate and correctly evaluate human life’.

Although Stalinist industrialization was marred by fecklessness – although with time the workers did get more proficient, and from 1937 a pall of fear hung over Magnitogorsk’s managers, prisoner-specialists and politicians, there was a genuine collective spirit both in industry and on the farms. The USSR allowed a limited workers’ democracy in the factories, whose members could suggest productivity improvements and demand better labor conditions – although direct criticism of the Party or its paramount leaders remained anathema. Even many prisoner-specialists supported the Soviet power out of patriotic pride for what they were doing to modernize Russia, even if they should suffer for it personally. The system was meritocratic, with subsidized education, higher pay for educated workers and bonuses and social status for Stakhanovites. Stalin himself was regarded as a kind of beneficent Tsar, father of the nation, and a competent ‘captain of state’ like the propaganda posters portrayed him.

Scott is firmly pro-Soviet and swallows whole the Bolshevik propaganda about Tsarist Russia as a land of, in Trotsky’s phrase, ‘icons and cockroaches’ – an incomplete judgment which ignores that by 1913 Russia had the vast majority of children acquiring some primary education and Europe’s fastest industrial growth. Although glossing over the nastier aspects of Soviet power, to his credit Scott is unwilling to deny them altogether (unlike, say, Ilya Ehrenburg). And Westerners too frequently forget that the regime enjoyed genuine popular support and that Stalinist industrialization was fuelled not only by fear, but by immense enthusiasm and fervor too.

Despite his experiences and occasional doubts, Scott remained a true believer in the Soviet project, saying that he shared a belief with its people that “it was worthwhile to shed blood, sweat, and tears” to lay “the foundations for a new society farther along the road of human progress than anything in the West; a society which would guarantee its people not only personal freedom but absolute economic security.”

Finally, the decision to build a military-industrial colossus in the Urals was a strategic masterstroke – “The Russian people shed blood, sweat, and tears to create something else, a modern industrial base outside the reach of an invader – Stalin’s Ural Stronghold – and a modern mechanized army”. Not only did its arms’ factories play a vital role in the Great Patriotic War, the physical infrastructure built up there enabled the smooth redeployment of evacuated factories from the west. Stalin’s Ural stronghold ensured that in most key weapons system, the Soviet Union would outproduce Germany by several factors and crush its blood-thirsty millennial dreams. To this day, Victory in that most total and terrible of wars remains Stalin’s primary legacy in the eyes of most Russians, that despotic Messiah who led and ruled them like the God of the Old Testament.

As a cynical former Economist journalist, Gideon Lichfeld, put it: “The truth is like a quantum superposition state: it is not one version or the other, but a strange combination of all them”. Now I don’t usually agree with Economist journos on Russia, but here I’ll make a big divergence. Though John Scott’s Behind the Urals undeniably suffers from a certain, pro-socialist bias, and sometimes engages in a near-absurd defense of Stalin’s purges, I nonetheless highly recommend it as a primary source on Stalinist Russia. The USSR in the 1930′s may not have been a utopia or anything remotely close, but neither was it the unadulterated Hell of deportations, famines and gulags painted by today’s Cold Warriors and their fellow travelers.

(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.