While economic reforms have met with success in former communist countries like Poland and Hungary, they have been singularly unsuccessful in Russia. Market distortions and unfair competition are deterring investment and hobbling productivity. MGI looks at the problem and outlines what needs to be done.
Despite reforms, productivity has fallen in Russia in the post-Soviet era. Even in sectors where competition exists, for example, it is often unfair so does not spur productivity. Unproductive companies have been slow to restructure, if at all, and govern.
Objectives and Approach
The purpose of this report is to shed light on the reasons for Russia’s dismal economic performance and help policy makers prioritize reforms. To do this, we analyze Russia’s output and productivity gap relative to the US and other transition economies, especially Poland.
From the start of the economic reforms in January 1992 until the end of 1998, Russia’s GDP per capita fell by around 40 percent and is now at 15 percent of the US level and about 70 percent of the Polish level. In effect, Soviet-era products and services found it difficult to pass the market test following price liberalization and a drop in government spending.
The main reasons for the productivity gap at the operational level in the Russian steel sector are low capacity utilization, excess workers in logistics, and overhead functions, and low yields on energy and raw materials.
The main reasons for the productivity gap at the operational level are very low capacity utilization, lack of multitasking, less automation in packaging and delivery and inferior wet/gas technology leading to much higher energy consumption and lower cement quality.
Oil production has halved since 1998, due mainly to less hydrostructuring and poor resevoir management techniques as well as inefficient drilling because of low quality drill bits, cleaning muds, and cement being used.
Labor productivity in Russia's dairy sector is 8 percent of that in the US. Low capacity utilization, inefficient organization of functions and tasks, lack of automation, and inefficient relations with suppliers accounts for most of the poor performance.
Despite some successes in attracting foreign investment, the levels are too low to make much of an impact on the sector. Low scale and lack of competitive intensity hampers productivity.
Food Retailing Sector
While supermarkets perform at productivity levels comparable to the US but, at less than 1 percent of the market, its effect has been neglible on the sector.
General Merchandise Retailing Sector
Only consumer electronics chains dominate modern chains in the general merchandising retail sector but in no other sub-sector is there that kind of penetration. Open-air wholesale markets don't provide much of a boost because they tend to be sub-scale and undercapitalized.
While the software business is Russia's most productive sector, it still lags behind US levels because of the prevalence of piracy, lack of demand.