NCPA - National Center for Policy Analysis

What Ails Russia?

November 4, 1999

Since the fall of Communism, Russia has managed to snatch defeat from the jaws of victory. Major sectors of its economy are in shambles and it has apparently wasted the opportunity to adopt a stable, capitalistic system. The price of that failure has been a plunge of more than 30 percent in gross domestic product since 1989.

The McKinsey Global Institute recently completed a study of key Russian industries and concluded that the economy is burdened with a unique brand of government manipulation of particular industries and companies that guarantees decline and decay. The most productive companies not only fail to make money, but are being driven out of business by government-subsidized laggards.

Here are several examples of how Russia is tragically off course:

  • About one-quarter of Russia's steelworkers are employed in antiquated plants which are only 10 percent as productive as U.S. mills -- with their energy bills subsidized by local authorities fearful that massive unemployment will result if they are allowed to close.
  • Only 0.2 percent of Russian food sales are through efficient supermarkets, while one-third of sales are through markets which are only about 25 percent as productive as the first-class supermarkets.
  • Because the supermarkets must pay taxes equal to 8 percent of sales -- versus 1 percent for small food vendors -- no multinational food retailer will bring best-practice food retailing methods into the country.

Getting rid of government micromeddling would carry the added benefit of reducing corruption -- much of which is closely tied to the intricacies of government support programs.

There are a few bright spots which are flourishing, by comparison, because the government has adopted a hands-off policy.

  • The totally unregulated custom software industry is 72 percent as productive as its U.S. counterpart.
  • Because politicians in the Novgorod region resist interfering in the local economy, GDP per capita climbed 3.8 percent a year from 1995 to 1998 and the area attracts five times as much foreign direct investment per capita as the rest of Russia.

Source: William W. Lewis (McKinsey Global Institute), "In Russia's Economy, It's Survival of the Weakest," Wall Street Journal, November 4, 1999.


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