Jan 20 2014, 8:46am CST | by Forbes
Ever since it was lumped in with the BRICs, people have judged the performance of Russia’s economy primarily in comparison to India, Brazil, and China. While Russia does not necessarily come out looking bad when compared to Brazil, if you look only at headline GDP growth numbers then it is clearly lagging pretty far behind India, China, and several other of the more dynamic emerging markets. Quite a lot of people never thought Russia belonged in the BRICs in the first place, and the calls for removing it from the club grew ever louder as its 2013 GDP number were repeatedly revised downward to a measly 1.4%.
While I think the BRICs are an interesting concept, and while Jim O’Neill, the person who coined the term, accurately predicted a strong shift in economic gravity away from the developed world, the simple fact is that Brazil, Russia, India, and China are extremely different countries with extremely different cultures, politics, economics, and demographics. Apart from being large, they just don’t have very much in common.
I’ve long thought that it makes far more sense to compare Russia to the countries with which it shares the myriad aftereffects of state socialism. Russia and the countries of Central and Eastern Europe are, of course, not identical. But in trying to build market structures on the wreckage of the command economy, Russia and other post-Communist countries have shared many of the same economic, social, and political challenges. They inherited economies that were way too focused on heavy industry and that had extremely under-developed service sectors. Manufacturing both employed way too large a percentage of the workforce and was extraordinarily inefficient. Banking systems were practically non-existent, and the management of state finances was chaotic (at best). Due in large part to uncertainty over the new “rules of the game,” corruption was pervasive and on a scale rarely seen in other periods of history. This was a specific set of challenges that few countries outside of Eastern Europe had to face.
And so while Russia looks like a sclerotic failure when you compare it to China or India, it looks a lot better when you compare it to Poland or Romania:
This won’t necessarily be true in the future: it’s entirely possible that, five years from now, Russia will lag behind other parts of Central and Eastern Europe that have made a more concerted effort at economic reform. But at the moment Russia is simply not lagging behind the countries to which it is most similar. It’s performance is very much in line with the region.
Russia’s economy clearly has a lot of problems, with persistently high capital flight at the top of the list and corruption not far behind. But I still think it is noteworthy that virtually every country in the region has gone through a period of protracted economic weakness over the past several years. Some of Russia’s slowdown is domestic in nature, but when a decelerating Russia is still growing more quickly than traditionally strong performers like Poland and Slovakia, it strongly suggests that there is something that is negatively impacting the entire region’s economy.
Whatever that “something” is, whether it’s excessively tight money from the ECB or the initial impact of the demographic shock of the early 1990′s, it cannot be solved by any one country acting alone. Which is to say that even if the Russian authorities suddenly get serious about economic reform, it probably won’t have much of a short-term impact.
Source: Forbes Business
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