‘Economic Innovation Is Impossible without the Right to Fail’

The first plenary session of the HSE XX April International Academic Conference continued with a discussion on the sources of economic growth, budgetary policy priorities, as well as investment in infrastructure and human capital. Experts from HSE joined other participants to speak on these issues.

No Growth without Economic Activity

When technologies become obsolete in less than five years, creating a long-term programme with specific measurement targets is an economic fantasy, declared Yaroslav Kuzminov, HSE Rector, before the presentation of the report by HSE. ‘But having a strategic vision of sources of growth for the next one or two decades is essential,’ he added. ‘Neglecting this might be even a bigger mistake than an attempt at detailed planning.’

Kuzminov named three growth drivers for a ten-year period and longer: infrastructure (primarily, digital economic infrastructure), human capital, and institutions. Institutions here mean not the laws that can change life at a moment’s notice but rather the expectations that people have of one another.

The key restraint to growth is the limitation of economic activity related to unstable legal arrangements for property and contracts. ‘Almost everything – any contract, any deal – can be contested,’ Yaroslav Kuzminov noted. ‘The zone of what is undisputed is quickly narrowing – either to a space where up to 90% belongs to the state or to a full lack of investment activity. We must restore the right to fail in the economy, since innovation is impossible without it.’

We need to re-purpose the work of law enforcement agencies to support economic growth and quality of life for citizens.

‘We must close the loopholes that allow entrepreneurs to be dragged into criminal proceedings,’ the HSE Rector also said.

He called investment in human capital insufficient. The issue here is not only education, the return on which will be obvious over the long term, but one of short-term measures that are also necessary, such as those related to migration, which can provide an immediate result. ‘Today, I read that the Ministry of Economic Development is planning to propose a programme to attract highly qualified specialists Russia only in summer 2020,’ Kuzminov said. ‘I really don’t understand why this would take a year.’

Human Capital Requires Investment

Natalia Akindinova, Director of the HSE Centre of Development Institute, presented the HSE report and noted several challenges faced by the Russian economy today. A negative demographic trend, i.e., a declining workforce that isn’t offset by an increase in the retirement age, is one of the main challenges. Growing monopolization and a consistently increasing role of the state, accompanied by weak legal protection for entrepreneurs, are also obstacles for innovation.

Nevertheless, Russia has capabilities (including those related to digitalization of the economy) to improve living standards, create new jobs, and increase production capacity. To take advantage of them, we must actively invest in human capital.

For Russia, the human capital index, calculated using the most recent World Bank models, is 0.73 (1 is the maximum indicator, with complete education and ideal health). ‘This is a good result, but there is room for improvement,’ said Ms. Akindinova.

Total spending on education and health care as a share of GDP has stagnated in recent years. Even with national projects, the levels of public spending on human capital will not grow in the next few years.

If the inertia continues, Russia’s population will shrink by 1.7 million by 2035, and the working population will shrink by 5.4 million.

Under a different scenario, with growing investment in human capital, the total population may grow by 2035 (thanks to immigration, among other reasons), with the labour force only decreasing by 2.5 million.

‘We don’t claim that this is the only factor needed to achieve economic growth at a higher rate than the global average,’ Ms. Akindinova noted. ‘Undoubtedly, we need to invest in infrastructure and to increase total factor productivity, which is impossible without institutional changes and better protection for businesses.’

Economic Growth Makes No Sense without Improved Quality of Life

Andrey Makarov, Chair of the Budget and Taxation Committee at the Russian State Duma, spoke about three key problems: economic growth rates, the situation in the Russian regions and their readiness to implement the government’s programme, and the investment climate.

Mr. Makarov believes that the situation in the global economy, with developed economies slowing down, can help when it comes to Russia outperforming average global growth rates. But this situation will inevitably impact Russia, especially its exports. Who will need them in the event of a global economic recession?

Russia’s regions also demonstrate a contradictory situation. On the one hand, last year, they showed revenue growth of 1.7 trillion roubles (mainly thanks to growing profit tax and personal income tax), with growth of expenditures by 0.5 trillion roubles. This means that while regions are accumulating money, there is a situation in which neither local money nor federal budget money is being invested to achieve the goals mentioned by Finance Minister Anton Siluanov at the plenary session. Furthermore, the share of investment in consolidated budget revenues in the constituent territories of the Russian Federation in 2009-2018 decreased from 17.2% to 10.8%.

The investment climate is directly related to the work of law enforcement agencies, believes Andrey Makarov. ‘If we have scandalous arrests in agricultural corporations on the first day of the Sochi Forum, and on the last day foreign investors are arrested,’ he said, ‘everything that happened at the forum, all the good presentations about support for business, becomes meaningless.’

Vladimir Mau, Rector of the Russian Presidential Academy of National Economy and Public Service, also cited three internal risks as it relates to achieving the stated development goals. One risk involves games of strategy and fighting to execute on them. There are too many factors in economic development right now that can’t be accounted for in detail.

Everything that can be successfully accounted for in the next couple of years is usually bad for long-term growth, and vice versa.

Another risk is institutional. There is a well-known saying about the strictness of Russian laws, which is compensated by the optionality of their implementation. ‘But we have found ourselves in a terrible trap, when the quality of laws has remained low, but it is almost impossible to avoid abiding by them; otherwise, one becomes a criminal,’ Mr. Mau believes. The need to adhere to low-quality laws is an obstacle to economic growth.

Mr. Mau also believes that there is a risk in ‘fetishizing’ the national project goals. ‘With all our love of economic growth, we must understand that it only makes sense as long as it is an indicator of growing wealth.’

Meanwhile, the real earnings of the population are continuing to fall, said Mikhail Zadornov, Chairman of the Management Board of Otkritie FC Bank. As compared with October 2014, they have fallen by 20% in real terms. According to IMF data, Russia has fallen to 22nd place by GDP per capita among the world’s largest economies. The lack of prospects for serious growth in household incomes is creating an alarming situation both socially and politically.

Mr. Zadornov believes that the sources of budget incomes and expenditures must be decentralized. Speaking about relieving pressure on businesses, he believes that attention should not only be paid to the activities of law enforcement agencies, but also to the courts.

Trust Is Key to Success

Ksenia Yudaeva, First Deputy Governor of the Bank of Russia, sees the current economic situation as close to equilibrium and without serious inflation risks. ‘Unfortunately, this is equilibrium with rather slow rates of economic growth. However, unemployment and certain other indicators are at a historically low level,’ she explained.

Ms. Yudaeva agreed that the potential to boost growth is mainly related to the investment climate and human capital, and importantly, not only with its accumulation, but also with its use. ‘Some investment climate problems don’t even allow us to use the human capital we have,’ she said. ‘These are two interrelated problems that should be solved together.’

Alexander Auzan, Dean of the MSU Faculty of Economics, sees a ‘huge resource for growth’ in cutting transaction costs, which are extremely high today. He referred to a study by French economists (Algan, Cahuс, Inherited Trust and Growth) who examined the connection between the dynamics of social capital and GDP per capita. They calculated how this GDP indicator would grow in different countries if the level of general trust (i.e., people’s trust in public institutions and in each other) were the same as in Sweden. For Russia, the increase would be 69%.