Неэргодическая экономика

Авторский аналитический Интернет-журнал

Изучение широкого спектра проблем экономики

Russia’s Public Industrial Sector: Disproportions of Development and Ways of Eliminating Them

Mistakes made during the formation the public sector of Russia’s economy and the system of its regulation are discussed in the article. The authors show that the Russian executive bodies ignored positive foreign experience during the economic reforms and outline ways to normalize the situation.

At the initial stage of reforming its hypertrophied public sector, Russia faced the choice: Which road to take and which model to implement? In fact, nothing has changed since. It is impossible to leave everything as is, yet it is not quite clear which way to direct positive changes.

 

The North American design for developing a Russian model of the public sector

 

An unbiased analysis shows that no standards and templates exist for the public sector of an economy. It is huge in some countries (Greece, Italy, and France) and almost nonexistent in others (Japan and Luxembourg); focused on a small number of economic sectors and industries (the Netherlands) or “scattered” all over the economy (France and Portugal). It is highly efficient in Sweden and France and ineffective in Belgium and the United States. Some countries have a unified system of business management within the public sector (Sweden), while others, a system of “dotty” (single business) management (United States). Thus, a specific national model operates everywhere, and the main issue is the success of its practical implementation. Theoretical debates about choosing the “right” model for the public sector have stopped; even in Russia the problem has entered the practical phase of trials and errors.

Nevertheless, certain common principles and patterns for constructing national models do exist. A main principle states that no government should put up with a large but inefficient and financially burdensome public sector. It is either ineffective where its size and funding might be minimal, or highly effective with a share in the national economy that is very large. Presently three models of the public sector are distinguished: West European (Portugal, France, and a few other countries), North American (the United States and Canada), and Asian (Japan and South Korea) [1, pp. 24–26].

The West European model is mainly characterized by a sufficiently large, highly efficient, and generously funded public sector with a diversified industrial structure. The North American model, on the contrary, represents an underdeveloped and inefficient public sector, which mainly specializes in purely state functions–defense and social infrastructure–based on a system of “stingy” funding. Both models maintain a clear boundary between private business and the state. This boundary is diffuse in the Asian model: the interests of the state and private business interlace with each other through representatives in power and corporate structures. This model results in a formally small public sector that receives tangible financial and organizational support from the state.

Each of the above models has its historic and geographic extremes. For example, the Reagan administration, advocating the North American model of the public sector in its most refined form, suggested the privatization of such untraditional entities as national parks, nature reserves, the national weather service, offshore oil fields, railroad transportation utilities, the postal service, schools, and even prisons [2, p. 149]. Many of these were not carried out, but the principle itself that offered maximal relief of the state budget during the cold war period when it was overstrained with defense expenditures is symptomatic. An example of the other extreme in the implementation of the European model is Sweden, who relies on its huge public sector (32% of the country’s employed) and fantastic government spending (64% of the GDP) to build so–called Swedish socialism.

Both above–mentioned approaches have their followers in Eastern Europe. For example, the extravagant idea of the Reagan administration was carried out to its logical conclusion in Latvia. According to Latvian law, everything can be privatized except the manufacture of armaments, which is nonexistent in this country. For Latvia there is only one problem–deciding when to start the privatization procedure of an entity. Even now local high–ranking officials cherish hopes that the railroads, mail service, and international airports will undergo a privatization procedure in the near future [2, p. 148], while Poland follows the road of Swedish socialism. It keeps the share of government spending of its GDP at the level of 47% [3, p. 129], which is 1.5 times higher than the analogous indicator for the United States. However, there is no guarantee that both Latvia and Poland will not make a U–turn in their policies as time goes by.

As for Russia, one may boldly state that it has chosen the second of the two chief models: West European and North American. Actually, the size of the Russian public sector shrank considerably in recent years; its funding was trimmed to the limit and its performance is utterly unsatisfactory. The problem is also aggravated by the fact that Russia has been unable to implement the North American model of the public sector in its pure form. Moreover, similarities can be seen in the economic mechanism of Russian state–owned enterprises and the Asian model. The interlacing of official and business interests deprives the Russian public sector of the necessary transparency and efficiency characteristic of the North American model.

Yu.V.Kurenkov rightly states that the North American model of the public sector is historically rooted in the fact that the United States has bypassed the problems and socioeconomic consequences of the feudal stage, powerful anti–capitalist forces have not evolved there, the central administration with wide economic authorities has not been formed, and the left has never come to power with large-scale nationalization programs [1, p. 24]. The history of Russia, reversely, abounds in such facts; as a result, Russia’s choice of the West European and not the American model seems more logical. Keeping in mind that the Russian public sector is actively evolving, it would be better to introduce the European methods and standards of managing the public sector, which would help partially straighten out the present situation.

 

Organizational bottlenecks of the public industrial sector

 

World experience does not reveal uniform standards or recommendations for which industries of the economy state interference is most expedient. As a rule, this problem is solved within a specific national model that presupposes certain sectoral priorities and a "national” view on the role of the public sector in a country’s economy. As the same time, international analysis shows that although the positions of the public sector differ from country to country, the differences are not as significant as that of their total relative size. For example, large state–owned companies in Italy control ferrous metallurgy, electrical industry, and shipbuilding. Spain has witnessed a gradual expansion of the public sector in power production, and strict government control is being established in this sphere. The British public sector dominates the coal industry and nuclear power production. In France the public sector’s position is strongest in power engineering–aerospace, electronic, chemical, metallurgy, and automotive industries.

If we speak about general regularities, we can state that the public sector mainly occupies postal services, railroad transport, telecommunications, and power engineering. Even in the United States, it fully dominates postal services and comprises approximately one–fourth of railroad transportation and power engineering [4, p. 17]. Thus, power engineering, transport, and communications are the sectoral priorities aptly controlled by the public sector. This regularity is especially vivid in European countries. In this regard, A.Bizaguet stresses that a significant influence of the public sector on the above three industries is constant in time and space [5, p. 67].

In addition, the share of the public sector in many countries is impressive in gas, steel, and air transport, as well as to some extent in the automotive industry. However, these are finer regularities that do not have the degree of stability inherent in power engineering, railroad transport, and communications.

Russia’s public sector still dominates the fuel–power and defense complexes, the medical and microbiological industries, and transport and communications. Private ownership has least proliferated industries with natural monopolies, such as power engineering and railroad transport. Considering these industries as traditional niches for state enterprise in almost all countries of the world, we may state that Russia moved along the general road of development of the world’s economy in the 1990s.

Yet this concept is too general and should be clarified. First, the positions of the Russian public sector has weakened recently even in its traditional niches. Second, one can see real differences in the architecture of the Russian public sector after comparing industrial structures in more detail. We will try to fill the present information gap.

We will focus on industry, since it is truly the most injured segment of the Russian public sector. Although the data available about the Russian public sector are incomplete and very inaccurate, still they allow us to outline the general picture and understand the main problems in the development of state enterprise. Table 1 represents data about the size of the public sector in industries [6, p. 3].

 

Table 1. Relative sizes of the public sector in Russia’s industry in 2000, %

Industries

Share in gross output

Share in total labor

Share in full book value of capital assets

Integral share of public sector

Total

10.1

14.9

1 1.9

12.3

including:

 

 

 

 

power engineering

9.3

10.4

7.1

8.9

fuel

3.9

13.6

4.8

7.4

ferrous metallurgy

2.6

5.7

3.9

4.1

nonferrous metallurgy

15.6

16.7

27.2

19.8

chemical and petrochemical

8.0

14.5

13.5

12.0

machine building and metal working

20.9

21.7

20.6

21.1

timber, woodworking, and pulp and paper

5.2

10.5

9.5

8.4

building materials

4.3

5.9

6.5

5.6

glass and porcelain–earthenware

1.7

4.4

7.4

4.5

light

4.9

6.2

5.6

5.6

food

6.6

9.3

12.4

9.4

microbiological

40.1

41.5

49.2

43.6

flour–cereals and feed mill

12.3

17.8

18.1

16.1

medical

15.8

18.3

23.3

19.1

printing

52.5

47.9

59.4

53.3

 

 

Judging by Table 1, one particular indicator is not enough to assess the size of the public sector, since the scale of an industry can greatly fluctuate according to various share–measuring indicators. For this reason, analytical procedures appropriately use an additional integral indicator in relation to the public sector’s size, for example, the averaged value of the three “primary” indicators. Such an approach is actively used in foreign practices when analyzing the development of the public sector and is adapted to the Russian system of statistical accounting.

Comparing Russian industries by the size of the above–mentioned integral indicator allows us to group them in three clusters. The first includes industries with a high share of the public sector (over one–third), namely machine building; nonferrous metallurgy; and medical, flour–milling, and chemical industries. The remaining eight industries fall in the third cluster with low shares of the public sector (less than 10%).

Even at this stage, certain significant incongruities are evident in the structural variance of the public sector in Russian industry. For example, while a high share of the public sector in the microbiological industry is largely justified and explicable, its prevalence in the printing industry obviously looks absurd.

To probe deeper into the structural distortions, we need to know the “ideal” relative to which deformations in the national economy occur. Strictly speaking, there is no such ideal. However, to make our investigation more or less definite, we can be guided by the potency of the interstate analysis. Let us take the French economy where the public sector is traditionally strong and economically efficient. Table 2 contains data about several French industries, reflecting the dynamics of the public sector’s position for two periods: immediately preceding the leftist government of F. Mitterrand coming to power in 1982 and from 1982 through 1986 [1, p. 80].

 

Table 2. The role of France’s public enterprises in industry, %

Industries

Share of public sector in output value

Before 1982

After 1982

Total

17.3

29.9

including:

 

 

coal production

99.3

99.3

oil and natural gas production

39.7

39.7

iron ore production

0.0

68.3

nonmetal ore production

n/a

52.6

power engineering

97.8

98.2

nonferrous metallurgy

16.3

60.7

building materials

n/a

5.8

glass

0.0

34.7

fundamental chemicals

11.6

47.8

special chemicals

5.1

9.2

pharmaceutical

6.6

24.3

textile

0.0

1.2

woodworking

0.0

2.4

pulp and paper

n/a

7.6

printing

0.0

0.3

 

 

Direct comparisons between the industrial structures of Russian and French industries are impossible due to differences in the classification of industries.

However, major distortions of the Russian model of the public sector can still be identified. [1]

First, the striking thing is misbalance in the distribution of the public sector, i.e., the diffusion of its industrial segment. In our view, the contribution of the public sector to the volume of industrial production in Russia has already dropped below its natural mark. For example, in the 1980s, in France, the share of the public sector to the aggregate industrial output fluctuated within 17–30%, while in Russia it was 10.1%. Of course, the French model of the public sector cannot serve as an absolute guideline for Russia. Nevertheless, taking into account the size of the Russian economy, the tradition of forming a powerful public sector, and the scale of economic problems facing the government’s industrial policy, it would be desirable to improve the existing situation by conducting correct structural maneuvering toward strengthening the role of state–owned enterprises. So far we can only state that the Russian government, dreading financial problems of the public industrial sector, has shrank its size so much that it has, in fact, deprived itself of the main leverage of reforming the national industry.

The reckless privatization has resulted in the size of the public sector in Russian power engineering turning out to be ten times smaller than in France where this industry is almost completely socialized. It is noteworthy that in Austria, Great Britain, Australia, Switzerland, and Canada, three–fourths of all assets of power engineering were also in the hands of the state in the mid–1980s. In this regard, we are surprised by the fact that despite the “impressive” result, the Russian leadership continues to force further privatization of this industry. In our opinion, the situation is simply absurd.

The state of affairs in the fuel industry also leaves much to be desired. The share of the public sector in France has not gone lower than 40%, while in Russia it is less than 4%. In 2000 the Russian public sector in nonferrous metallurgy was smaller than in France in 1982. If we take into account the fact that after 1982 the French public sector expanded its position in the industry 3.7 times, it is clear that Russia is moving against the world’s trend. In the glass industry, the share of the French public sector exceeded that of the Russian by a factor of 20. Chemical production in France is also significantly wider represented by state–owned enterprises than in Russia.

The opposite structural distortions exist also. For example, the relative size of the public sector in the Russian printing industry is 175 (!) times higher than the corresponding indicator for France, and in light industry Russia’s public sector is four times larger than that in the French textile industry. Since leather, footwear, and clothing enterprises have never been owned by the state in France, the identified structural distortion looks even more impressive. The concentration of the Russian public sector in the food industry in 2000 also seems excessive (9.3%), while in France it was only 1.9–2.0% in the 1980s.

The above data lead us to the conclusion that Russia actively disbanded the public sector where it should have been preserved and saved it where it was desirable to be eliminated. The present sectoral structure of Russia’s public industrial sector is very far from optimal. The main reason for this is the errors made at the stage of outlining the privatization of the Russian economy. To eradicate the present structural discrepancies, we need a radical revision of the existing paradigm of reforms in the national economy.

 

Efficiency collisions of the public industrial sector

 

The other side of the public sector’s size is its efficiency. If it is high, then the large volumes can be regarded as justifiable. Otherwise, the public sector represents a problematic element of the national economy. The data in Table 1 help calculate indicators of relative labor and capital productivities of the state–owned and private sectors of industry (a relative indicator is a measure of efficiency of the corresponding sector divided by the industry’s averaged efficiency index in percent form). The results of the calculations by industries are given in Table 3. They allow us to make a number of important conclusions.

 

Table 3. Relative indicators of efficiency of the public and private sectors of Russia's industry in 2000, %

Industries

Relative labor productivity in public sector

Relative labor productivity in private sector

Relative capital productivity in public sector

Relative capital productivity in private sector

Integrated efficiency of public sector

Integrated efficiency of private sector

Total
including:

67.8

105.6

84.9

102.0

76.3

103.8

power engineering

89.4

101.2

131.0

97.6

110.2

99.4

fuel

28.7

111.2

81.3

100.9

55.0

106.1

ferrous metallurgy

45.6

103.3

66.7

101.4

56.1

102.3

nonferrous metallurgy

93.4

101.3

57.4

115.9

75.4

108.6

chemical and petrochemical

55.2

107.6

59.3

106.4

57.2

107.0

machine building and metal working

96.3

101.0

101.5

99.6

98.9

100.3

timber, woodworking, and pulp and paper

49.5

105.9

54.7

104.8

52.1

105.3

building materials

72.9

101.7

66.2

102.4

69.5

102.0

glass and porcelain–earthenware

38.6

102.8

23.0

106.2

30.8

104.5

light

79.0

101.4

87.5

100.7

83.3

101.1

food

71.0

103.0

53.2

106.6

62.1

104.8

microbiological

96.6

102.4

81.5

117.9

89.1

110.2

flour–cereals and feed mill

69.1

106.7

68.0

107.1

68.5

106.9

medical

86.3

103.1

67.8

109.8

77.1

106.4

printing

109.6

91.2

88.4

117.0

99.0

104.1

 

First, in terms of economic efficiency, the public sector in all industries is inferior to the private. Only in the printing industry, labor productivity of the public sector is higher than that of the private sector. Similarly, capital productivity in power engineering has been higher in the public sector. Except for these two surges of efficiency, the public sector is unable to fully compete with the private sector in all other positions. Since opposite effects may be observed when comparing labor and capital productivities of the two sectors, it is also useful to derive a certain integrated indicator of efficiency, which is determined for each sector as an average value of the corresponding partial indicators. This averaging leads to the fact that the existing advantage of the public sector’s labor productivity in the printing industry is completely suppressed by the nega­tive correlation with capital productivity and finally the public sector of this industry also turns out to be an outsider.

The negative regularity is obvious: such key macro factors as labor and capital are much more poorly exploited by the public sector than by private economic entities of Russian industry. This means that presently Russia’s public sector is a source of waste of economic resources.

Comparing the integrated indicator of efficiency of the two sectors of Russian industry allowed us to group them into three clusters. The first includes industries with a high efficiency of the public sector (over 100%): power engineering is the only industry in it. The second cluster consists of industries with a moderate efficiency of the public sector (over 90 but less than 100%): printing industry and machine building. The third cluster comprises the remaining 12 outsider industries (less than 90%).

Presently the right to exist in terms of integrated efficiency belongs to the public sector of the first and second clusters only, i.e., three industries. With great reservation, we may add to them the microbiological and light industries. The continuation of the other ten industries is mainly justified by social imperatives. Of special concern is the public sector of the glass and porcelain–earthenware industries whose integrated efficiency is almost 3.5 times lower than that of the private sector. In our view, the fantastic misbalance of the public sector in this industry actively cries out to be completely liquidated. Thus, structural analysis proves the conclusion that the public sector of Russian industry has been absolutely unable to compete with private economic entities.

This state of affairs should by no means be considered a regular phenomenon. A double mismatch is evident between trends in development of the Russian public industrial sector and the world.

First, the relationship between the efficiency of state–owned and private sectors in Russia is turned inside out relative to the situation in the majority of the countries of the world where labor productivity in the public sector is higher than that in the private sector [7]. If we consider only the industrial segment of the national economy, the advantages of its public sector are especially vivid. For example, according to our estimates, labor productivity in the French public industrial sector is 1.4 times higher than in the private sector, while in Russia it is 1.6 times lower. Consequently, unsatisfactory results of the Russian public sector are directly rooted in the specific organization of the Russian model.

The second aspect of the problem is directly related to the size of disproportions identified. It turns out that the high efficiency of public sectors in other countries is not a total phenomenon: in some industries, it yields its palm to the private sector. (For example, in France labor productivity of the public sector in power engineering is 43% lower than in the private sector). However, such a gigantic distortion as, say, in the Russian fuel industry, where labor productivity in the public sector has been 3.9 times lower than in the private sector, has not been observed anywhere else. Yet, for Russia, this is not a rare occasion. For example, in the woodworking industry, the gap has been 2.1 times, and in the glass industry, 2.7 times. It is obvious that such fluctuations in economic efficiency are not inherent to the public sector as such and this is the “achievement” of its specific Russian model.

Thus, in terms of the economic efficiency of the public sector’s development, Russia goes against the world trends. The main reason, in our opinion, is the inadequate system of management of the Russian public sector. This problem requires special analysis.

 

Explaining the low efficiency of the public industrial sector

 

We will single out three reasons for the poor performance of the Russian public industrial sector: statistical, financial, and managerial.

Let us start with the reason that can be called statistical with a certain degree of conventionality. It turns out that the public sector is a very heterogeneous production formation in practically all countries of the world. This fact is probably manifested most vividly in the official ideology of the Swedish government, which divides all public enterprises into two groups–those working in market conditions and those expressing specific interests of society (in other words, enterprises with state interests).

Enterprises of the first group represent a form of state enterprise and pursue high economic results. Enterprises of the second group are burdened with additional social goals and objectives that are implemented to the detriment of economic efficiency.

Such structural division helps identify the specifics of the present stage of development of the Russian public sector; namely, state enterprise in Russia has not been properly developed, and the larger part of the public industrial sector consists of enterprises of the second group. It is clear that this mono structure of the public sector cannot be highly efficient.

This narrowness, which reflects Russia’s neglect of international accounting standards, is a logical effect of the initial stage of its formation. In this sense, it is possible to say that the Russian public sector is still in its infancy.

It is possible to change the existing situation by improving policies of developing the public sector, which should provide two relatively independent modules: a policy concerning public enterprises that operate in market conditions and a policy for public enterprises with social interests. The first module is in its initial stage in Russia, while the second one is totally absent. In the meantime, the development of the latter is a nec­essary condition for improving the general efficiency of the public sector of Russia’s industrial complex.

The basic policy for a balanced development of the two groups of public enterprises should be, in our opinion, an adequate system of statistical support, which can be built using the positive experience of Sweden where a differentiated system of accounting for the two above categories of enterprises was introduced. For enterprises operating in market conditions, there is a truncated system of statistical indicators aimed at assessing enterprise profitability and financial and economic efficiency; for enterprises of the second type, there is a more complex system of statistical indicators that includes, besides purely financial indicators, those that assess the degree of achieving social goals that face an enterprise.

The formation of a similar statistical system in Russia to support the policy of the public sector development could improve the openness and transparency of goals and objectives of the public sector, as well as the degree of their implementation. Besides, this would yield additional information about the structure of the two groups of public enterprises, thus providing a basis for optimizing their operation.

Let us now consider the financial sources of unsatisfactory work of the public industrial sector. Our latest investigations yield an important conclusion: if the public sector is financed well, it becomes a highly efficient segment and technological vanguard of the national economy and if it is underfunded, it will soon turn into a low efficiency burden for the nation [7]. Developed countries have realized that, and their governments deliberately implement one or another approach. This dilemma still seems inconceivable at the governmental level in Russia: great achievements are expected from the public sector, but its needs are very poorly funded. We are not only talking about extremely low levels of government spending in terms of GDP, but also about individual items of budgetary expenditure. For example, R&D expenditures in 2000 were 1% of GDP, while in developed countries this indicator fluctuates around 3% [1, p. 51]. The share of investments in the fixed capital of the “science and science support” industry decreased from 1.7% in 1990 to 0.6% in 2000, i.e., approximately three times [1, p. 58]. Outlays for basic research and the promotion of scientific progress were 1.8% in the structure of the 2002 federal budget, which is 2.2 times less than the 4% level stipulated by the federal law on science and technology policies [1, p. 59]. The share of budgetary expenses for the needs of industry, power engineering, construction, and agriculture did not exceed 5.1%, while it reached 10.4% on law and security activity [1, p. 59]. Thus, unlike the practices established in developed countries, the Russian budget does not address the serious goal of subsidizing the real sector of the economy, including its public sector.

For example, the power of the French public sector whose share during the Mitterrand administration was 30% of the GNP and 50% of all allocations to R&D in industry seems really fantastic, compared to financial priorities of Russia. Meanwhile, foreign experience shows that this is not by chance. In developed countries, the state constantly renders financial assistance to industry. For example, its share in the equivalent net output of industry in the early 1980s was 15.4% in Sweden, 7.1% in Italy, 4.0% in the Federal Republic of Germany, and 3.6% in Great Britain [8. p. 43]. Such financial generosity is too distinct from the restrictive financial policy of the “stingy” Russian government. In short, Russia falls out of the world mainstream of development in terms of financing its public sector, which critically predetermines its low efficiency.

Yet the hardest blow on the Russian public sector was caused by its absolutely useless management system. For better understanding, let us review this sphere in retrospect.

The functioning of the Russian public sector has never been administered by a single executive body; it has always been distributed among various institutions according to industrial and functional characteristics. The beginning of the “great integration” seems to date from 1997 when a special department was established at the Russian Ministry of Economy to serve, at least in theory, as the main coordinating body for public enterprises. However, the coordination did not occur in practice, for the reason that Russia was institutionally unprepared for this. The above department had neither the authority nor the personnel to do the job. As a result, its work dwindled to a strange type of passive activity: analyzing and forecasting the development of the public sector. This was probably the first strategic mistake of the Russian government, because world experience clearly showed that the state should carry out an active role concerning the public sector and not passively watch it.

It turned out consequently that it was practically impossible even to do a correct analysis of its development, to say nothing of forecasts, because there was no precise definition of the public sector as a phenomenon and no statistical reports about its performance. Laborious and complex work to fill in this gap was very actively carried out in 2001–2002 within the Russian Ministry of Economic Development and Trade, the legal successor of the Russian Ministry of the Economy. The initial concept was to solve the whole complex of problems dealing with the management of the public sector at one stroke by developing and adopting a specialized law regarding the public sector. However, this approach turned out to be unrealistic. The draft law was so large and included so many disputable issues that its adoption by the State Duma might take too long.

As a result of mutual consultations, specialists of the Russian Ministry of Economic Development and Trade and the Institute of Macroeconomic Research realized that the formation of the management system for the public sector should be based on step–by–step filling in of the gaps in the current legislation. An alternative decision was made to prepare a portfolio of relatively compact legal acts, each of which would be aimed at solving a specific problem of public–sector management. Implementing key concepts by adopting government resolutions and presidential decrees is much easier than carving a monumental law. At the same time the accumulation of such legal documents would make the public realize the necessity for a corresponding law and create an institutional base for its subsequent submission for discussion. This was the essence of the portfolio concept of step–by–step implementation of the public–sector management system.

However, all good intentions were totally ruined in mid–2002 by another institutional restructuring. The composition, functions, and authorities of the ministry’s departments changed once again. Finally, the initial development of the public–sector management system was stalled, and the ideology of the new leadership took the upper hand, which claimed that the public sector was evil and should be minimized. The managerial problem reached the phase of developing a program to privatize what had not been privatized yet.

The Russian powers withdrew from solving the problems of the public sector, which is again contrary to world practices. Practically all developed countries work out the so–called industrial policy, the core of which is the public industrial sector. Complex institutional systems are created to implement industrial policies based on legal institutional norms and rules. Russia is characterized by an extremely poor range of tools for the industrial policy, as well as by the small number of economic entities involved.

These are the brief reasons for the dilapidated and unviable public sector that Russia has in its leading division of the economy–industry.

 

Errors in managing the public sector

 

Would it have been possible in terms of macroeconomics to carry out a large–scale privatization and what would such a privatization lead to? As has been mentioned above, the public sector in the majority of developed countries is a vanguard component of the economy in the process of accumulating fixed capital. Presently, data are available that show that this concept is true for Russia as well. In particular, S.V. Kazantsev’s estimates indicate that in 1991–2001 the correlation ratio of indicators of the share of gross fixed–capital accumulation in terms of GDP to the share of private entities in the total number of enterprises was –0.837 [9, p. 68]. The value and the negativity of the correlation ratio mean that the investment activity of the Russian economy decreased with the growth of the private sector’s share. In other words, the thoughtless destruction of the public sector during the large–scale privatization was one of the reasons for Russia’s investment crisis and economic recession in the 1990s. In fact, here we witness an interesting paradox of state policy: a large–scale privatization of the public sector in order to stabilize the macroeconomic situation has led to the deterioration of all key macroeconomic parameters. Consequently, the government measures yielded results opposite of those initially intended. Here is a classical error of the system of state regulation.

Let us pose another question: What did the state gain, having suppressed the public sector and investment activities in Russia? Could it fill its treasury enough to compensate for the damage from the investment crisis?

The answer turned out to be negative. According to estimates available, the state was able to earn only 15% of the real value of privatized state property [9, p. 72]. In absolute figures, the state income in 1992–2001 was 123.1 billion rubles, which is equivalent to $4.1 billion according to the current exchange rate. (Compare: in 1988–1992, as a result of its “microscopic” privatization, Japan gained $23 billion [10, p. 63]. The “light” five–year–long Japanese privatization yielded 5.6 times more finances than the total ten–year–old Russian privatization.)

As a result, 85% of the value of the state property privatized passed by the government treasury and settled down in the pockets of individuals. This caused a colossal redistribution of the accumulated wealth among the few. The mechanism of such redistribution is quite simple: enterprises that went bankrupt or were close to failure were sold for nothing. Spontaneously, a system of payments sprang up for government decisions acknowledging bankruptcies [9, p. 80]. Such an approach radically contradicts world practices. For example, in France, during the wave of privatization in 1986–1988, 31 enterprises were sold, most of which belonged to highly competitive industries and were profitable when privatized [1, p. 82]. The whole world admits that privatization of unprofitable enterprises is unjustifiable during an economic crisis. It would be much more profitable to initially improve the performance of a state–owned enterprise, make it operational, and then sell it at a considerably elevated price. The liquidation of the Russian public sector took a totally different road. As a result, an acute deficit of budgetary funds added to the investment crisis, which excluded the possibility of state financial support for the most needed and important economic sectors.

Faulty privatization has led to a worsening of the general moral climate in Russia. For example, according to sociological polls, 39% of Russians associate the entrepreneurial approach with speculation; 34%, with embezzlement of state property; and 17%, with laundering criminal money [9, p. 67]. Society has practically no trust in businesspeople and their activity, which is fraught with many negative consequences for the newly born capitalist state.

People have lost trust in officials too. Bribery, corruption, unprofessionalism, and bureaucracy of Russian officials have become a barrier on the road of normalizing economic life in the country. The situation is aggravated by constant institutional fracturing, when executive bodies split up and merge, with a high staff turnover and radical revision of previously adopted decisions. As a result, any interference by the state in the economy is conceived by both public and business circles as an obvious mistake. The current situation cannot be regarded as typical. Good proof of the turpitude of Russian reality is the classical example when, to the question of Nobel Laureate V.V.Leont’ev why Japanese companies follow recommendations of the Japanese Ministry of Trade and Industry that have no binding force, a Japanese businessman answered that the business circles adhere to the advice of government officials because the latter are considered highly qualified and experienced specialists [11, p. 22]. Indeed, the staff of the Japanese Ministry of Trade and Industry is traditionally replenished with the top graduates of Tokyo University [8, p. 45].

The mutual alienation of business, officialdom, and the population means that the state has lost economic leverage. On the one hand, its influence on the economy through the constantly shrinking public sector becomes weaker, and on the other, it is unable to affect the private sector, which has no desire to listen to the advice of government bodies. It is necessary to quickly improve the whole leverage of industrial policy, which preliminarily presupposes the choice of a policy that is protective, adaptive, or initiating [8, p. 48]. Under the present conditions, an initiating industrial policy is, of course, most adequate and promising, because it is aimed at forming the wishful “image” of the country’s future economy and methods of practical implementation of this image. However, Russia has no industrial policy as such; it has never been explicitly envisaged anywhere, no sectoral priorities have been identified, and no tools for and terms of achieving the goals have been set. Everything that the Russian government parades falls into the protective type of industrial policy with few adaptive elements. As for elements of the initiating policy, they are not discerned at all.

Meanwhile, Japan introduced the classical pattern of an initiating industrial policy right after World War II. The Japanese authorities departed from traditional economic priorities and used the criterion of high production elasticity by demand. This served as the basis for determining a list of promising industries, which in the 1960s included the automobile industry, heavy engineering, computer engineering, and petrochemistry [8, p. 57]. Presently, the United States is no less open than Japan in proclaiming its priorities to completely transfer its economy in the next ten years to energy-saving technologies and abandon its oil imports from abroad. The United States invested $4 billion in the development of new technologies, including microgeneration fuel cells [11, p. 25]. Unfortunately, Russia has not yet mastered basic foreign experience, which would allow it to take a necessary step forward.

The presence of a powerful public sector is extremely favorable for implementing an initiating industrial policy. The state, through simple administration, can reorient all financial flows to the chosen lines within the enterprises available, which will accelerate and simplify structural maneuvering. If that had been the case, Russia would have had very good opportunities for a large scale technological restructuring of its economy at the beginning of the reforms. However, the continued “dumping” of state–owned enterprises into the private sector means that all finances will be reoriented toward the latter, and this is much more difficult to achieve and monitor.

A recognized line in an initiating industrial policy is to strengthen the scientific and research potential of the country, thereby providing and supporting its competitive advantages. The experience of South Korea is noteworthy here: its share of R&D costs in terms of GNP grew from 0.7% in 1970 to 2.0% in 1986,2.8% in 1990, and 5% in 2000 [8, p. 50]. A similar dynamic is also characteristic of large research laboratories of South Korean firms, whose number grew from three in 1967 to 14 in 1976, 52 in 1980, and 138 in 1984. As for Russia, the disintegration of the public sector–above all, its military and industrial complex–resulted in the loss of 300 technologies in such science-intensive industries as aerospace, ultrapure metals, numerically controlled machine tools, industrial robots, etc. [12, p. 49]. After Russian privatization, the following hierarchy has emerged on the world market of science-intensive products: the US share is about 40%; Japan, about 30%; Germany, 16%; and Russia, 0.3% [11, p. 9]. Thus, in its attitude to science and applied–science developments, Russia again goes against the world trends.

Glaring blunders were made by the Russian authorities when privatizing the fuel and raw–material industries. In fact, the state has let go super profitable spheres out of its hands. The argument that it allegedly had no funds to finance these enterprises is simply ridiculous. The accumulated reserves of Russia’s large private oil companies are estimated at about $15 billion [11, p. 27]. It is clear that preserving oil enterprises within the public sector would have allowed the state to dispose of this amount now.

This mistake might have been corrected more than once by introducing the mechanism of withdrawing the natural rent from the enterprises of the fuel and raw–material complex. Yet this was not done. A.G. Zel’dner estimated the profitability of export transactions from selling Russian oil; its value reaches 300% [11, p. 26]. If we assume the regular rate of profitability as 20%, then the value of the rental income, which should have been withdrawn for the benefit of the state but was left in private hands, would have been $11.4 billion in 2000 alone [11, p. 27], which is three times higher than the total revenues from the privatization that the Russian treasury received in the previous ten years.

The Russian authorities display the same attitude to the public enterprises, in particular, natural monopo­lies. In fact, in recent years the state did not control but encouraged price increases for the products of natural monopolies. The increase was 3–4 times higher than that of retail prices [12, p. 48]. Thanks to this “help” for its own enterprises, the state made natural monopolies unreasonably efficient. Their output in GDP was only 10%, while the volume of profits was 25% [12, p. 48]. However, the super profits received were spent on the shady needs of the monopolies themselves; continuing price rises hamper economic growth.

There are serious drawbacks in the day–to–day management of state–owned enterprises. As R.I.Shiryaev correctly points out, over ten years of the existence of the public sector the state has not shown its worth as the strategic owner and manager, limiting itself to the most passive function of ownership [12, p. 47]. Public enterprises practically operate as private economic entities, upholding the interests of their executives and alienating their financial assets from state control. An idea was expressed in the literature that, when the majority of scientific institutions are patronage by the state, while their property is owned privately, science serves the private sector at the state’s expense at extremely low salaries, wages, and pensions of scientists [11, p. 9]. This has been going on for years, and there is no end in sight. Meanwhile, a more active personnel policy might contribute to the solution of this problem. In France, for example, during the privatization in 1993–1996, enterprises were actively restructured with intentions to give up noncore production facilities and replace the majority of presidents and general directors of companies accountable to the state [1, p. 83].

Among other defects, we can name the absence of state support for public enterprises of strategic importance. Moreover, many of them were not transferred money for fulfilled state orders, while large private businesses, such as SBS–Agro Bank, Mostbank, Imperial Bank, and others received huge loans, which were usually never returned [12, p. 49].

Thus, quite strange relations have developed between the public and private sectors, as well as between individual segments of the public sector, which hamper development of the Russian economy. The intermediary and initiator of such relations is the state.

All the above–mentioned drawbacks of the modern management system of the public sector in Russia can be removed. Yet this requires the readiness of the top echelons of Russian power.

 

References

 

1. Natsional’naya promyshlennaya politika konkurento–sposobnosti: opyt Zapada–v interesakh Rossii (National Industrial Policy of Competitiveness: Western Experience–In the Interests of Russia), Moscow: IMEMO RAN, 2002.

2. Balatskii, E.V. and Konyshev, V.A., Criteria and Priorities of State Property Privatization, Obshchestvo Ekon., 2002, no. 12.

3. Nigmatulin, R., On the Optimal Share of Governmental Expenditures in GDP and the Rates of Economic Growth, Vo pi: Ekon., 2003, no. 3.

4. Gosudarstyennaya sobstvennost' v razvitykh kapitalis–ticheskikh stranakh v 80–e gody: kurs na privatizatsiyu i sozdanie smeshannykh predpriyatii (State Ownership in Developed Capitalist Countries in the 1980s: Heading for Privatization and the Establishment of Joint Ventures), Moscow: INION, 1989.

5. Bizaguet, A., Le secteur public et les privatisations (State Sector and Privatization), Paris: PUF, 1992. Translated under the title Gosudarstvennyi sektor i privatizatsiya, Moscow: Kompozit, 1996.

6. Balatskii, E.V., Specific Features of the State Sector of Industry, Ekonomist, no. 6.

7. Balatskii, E.V. and Konyshev, V.A., The Role of the State Sector in the National Economy: Worldwide Tendencies, Obshchestvo Ekon., 2003, nos. 7–8.

8. Zeltyn", A.S., State Industrial Policy in Market Economies, EKO, 2003, no. 3.

9. Kazantsev, S.V., Change of Formations, EKO, 2003, no. 3.

10. Biryukov, V. and Kuznetsova, E., State Ownership and State Sector in Market Economy, Mirov. Ekon. Mezhdunar. Otnosheniya, 2001, no. 12.

11. Zel’dner, A.G., The State in the Strategy of Russia’s Response to the Challenge of the New Century: Globalization, in Gosudarstvo i ekonomika: faktory ekonomicheskogo rosta (State and Economy: Factors of Economic Growth), Moscow: Inst. Econ. Ross. Akad. Nauk, 2002.

12. Shiryaeva, R.I., State Ownership in the System of Factors of Economic Growth, in Gosudarstvo i ekonomika: faktory ekonomicheskogo rosta (State and Economy: Factors of Economic Growth), Moscow: Inst. Econ. Ross. Akad. Nauk, 2002.

 


[1] The comparison of the French and Russian public sectors is not exactly correct, due to the underestimated number of subsidiaries of Russian state stock companies. However, this statistical dis­crepancy does not largely affect the results of the analysis. A more significant problem is the mismatch between the classifica­tions of industries in the two countries. In our opinion, this fact cannot fundamentally distort the conclusions.

 

 

 

 

Official link to the article:

 

Balatskii E.V., Konyshev V.A. Russia’s Public Industrial Sector: Disproportions of Development and Ways of Eliminating Them// «Herald of the Russian Academy of Sciences». Vol.73. No.6. 2003, pp. 388–597.

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