eng modernization of the russian

partner of the projectSumma Capital investment group

Report for Global Policy ForumRussia, Yaroslavl, 2010

Modernization of the Russian economy: from theory to practice

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TABLE OF CONTENTS

Modernizing Russia: Round III.Russia and the other BRIC countries: forging ahead, catching up or falling behind? 2Erik ReinertProfessor of Technology Governance and Development Strategies at Tallinn University of Technology, Founder and Chairman of the Other Canon FoundationRainer KattelProfessor and Chair of Public Administration and European Studies, Tallinn University of Technology

An enterpreneurial nation 34Tatiana GurovaEditor-in-Chief, Expert Media Holding

Birth of National Innovation System 56Dan MedovnikovHead of Expert Innovation BureauStanislav Rozmirovich, Tigran OganesyanAnalysts of Expert Innovation Bureau

Human Resource Support for The Russian Workforce Reorganization Program 88Vadim MarshevProfessor of the Management Department, Economic Faculty, the Lomonosov Moscow State University Member of Board of Directors, the Summa Capital

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Introduction. Modernizing Russia: The Context.‘Despite many currents and cross currents, continuity is perhaps the most impressive phenomenon in the history of economic doctrines.’1 These words of a very experienced economic historian are still extremely relevant, including for economic policy. But continuity in economics is peculiar and cyclical. It does not manifest itself in smooth incremental transitions, but rather in the recurrence of similar sets of ideas in similar contexts over time. The economics profession and what is considered ‘best practice’ economic policy is, then, decidedly cyclical. Its cyclical quality appears to follow the same type of mechanisms of ‘destabilizing stability’ described by American economist Hyman Minsky, which lead to fi nancial crises.2 In the fi nancial sector, when things are stable and improving over long periods of time, risk evaluation procedures in banks grow increasingly lax, and in the end credit is given to people who are not even able to pay interest on the loans they are given (sometimes called ‘Ponzi fi nancing’, as with subprime loans). In other words, long periods of stability lead to increasing vulnerability, they lead to Minsky’s ‘destabilizing stability’. Similar cycles are at work in economics and industrial policy: long periods of economic progress in the core countries lead to increasingly abstract and irrelevant economic theories. ‘Bad’ theories – particularly as they are applied outside the economic core country– are allowed to dominate the discipline for long periods of time because the underlying economy is strong enough to withstand their poisonous infl u-

1Raymond de Roover, ‘Scholastic Economics: Survival and Lasting Infl uence from the 16th Century to Adam Smith’, Quarterly Journal of Economics, 69, 1955, 161-190.

2Hyman P. Minsky, Stabilizing an Unstable Economy, New Haven: Yale University Press, 1986.

MODERNIZATION OF RUSSIA

Erik ReinertFounder and Chairman of the Other Canon Foundation

Rainer Kattel Professor and Chair of Public Administration and European Studies, Tallinn University of Technology

Modernizing Russia: Round III.Russia and the other BRIC countries: forging ahead, catching up or falling behind?

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ences, but, eventually, reality catches up and disaster ensues. This brings less abstract and more relevant economic theories and practices back; mindless laissez-faire is abandoned and more active economic gov-ernance again becomes acceptable again. These turning points can, after their most famous manifestation, be referred to as ‘1848 moments,’ and they tend to be caused by economic crises, just as the 1848 turning point followed the severe fi nancial crisis of 1847.In his 1848 Principles of Political Economy, John Stuart Mill describes such moments well:

It often happens that the universal beliefs of one age of mankind – a belief from which no one was, nor without an extraordinary eff ort of genius and courage could at the time be free – becomes to a subse-quent age so palpable an absurdity, that the only diffi culty then is to imagine how such a thing can ever have appeared credible...It looks like one of the crude fancies of childhood, instantly corrected by a word from any grown person.3

Similar economic situations and constellations appear and – even centuries apart – reappear, and similar approaches tend to be reinvented. Sometimes the new theories refer to previous theories addressing simi-lar problems, sometimes not. As regards economic policy, periods of profound qualitative understanding alternate with periods dominated by abstract theories, when knowledge previously recognised as valuable is unlearned. As we shall describe below, since the 1760s, two diff erent approaches to economics – two dif-ferent parallel streams – have competed for attention and prominence. Sometimes one dominates, some-times the two streams are seen as complementary, and theoretical pluralism is seen as a natural thing. Dur-ing these times of pluralism, the economists’ toolbox is at its largest.In other words, long period of economic progress in the core nations create excessively abstract theories, which – in their turn – create economic havoc, fi rst in the economic periphery and later closer to the core. These ab-stract theories create social crises, and the theoretical turning-points we have labelled ‘1848 moments.’4 In the fi rst wave of irrelevance, the impressive economic growth of the Enlightenment climaxed in the eco-nomic school of Physiocracy which – contrary to all previous experience – recommended free trade under all circumstances. (Table 1) In Paris Physiocracy-based free trade in grain made it more profi table to carry grain out of Paris in order to speculate in rising prices, than to produce bread for the population of Paris. Free trade caused a serious shortage of bread and famine.In fact, the French Revolution broke out when news reached Paris that the anti-Physiocrat Jacques Necker had lost his position as French Minister of Finance. In practice, the Physiocrats lost almost every theoretical and practical battle except the one in today’s textbooks in the history of economic thought, where they hold a position which is completely unwarranted if one considers the economic policies that were actually carried out in Europe at the time. A second wave of ‘destabilizing stability’ in economics started with the publication of David Ricardo’s Principles of Economics and Taxation in 1817. Attempting to keep England’s virtual world monopoly in

3John Stuart Mill, Principles of Political Economy, London: Longmans, Green, Reader, and Dyer, 1848, 3.

4Erik S. Reinert, ‘The Terrible Simplifi ers: Common Origins of Financial Crises and Persistent Poverty in Economic Theory and the new ‘1848 Moment’’, UN DESA Working paper No. 88, December 2009, downloadable at http://www.un.org/esa/desa/papers/2009/wp88_2009.pdf

Table 1. Three Waves of Irrelevant and Economically Destructive Theories.

School Starting Point Peak Crisis New Pluralism.

Physiocracy (’Rule of Nature’) Quesnay 1758 1760s 1789 already 1770s

Classical Economics Ricardo 1817 1846 1848 ca. 1895

Neoclassical Synthesis Samuelson 1948 1990 1995+ NOW.

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manufacturing, Ricardo produced an economic theory which justifi ed the prohibitions on manufacturing in the colonies, postulating free trade as an agent of economic harmony. This wave peaked in the England’s Repeal of the Corn Laws in 1846, discontinuing British protection of agriculture in an eff ort to prevent other nations from protecting their manufacturing sector. A massive fi nancial crisis in 1847 and revolutions in 1848 in all large European countries – with the exception of Russia and Great Britain – put an end to the second wave of ‘economics as a harmony-producing machinery.’ 1848 produced three important books all critical of the economic order legitimized by Ricardian economics: Karl Marx and Friedrich Engels’ Communist Manifesto (Marx was so radical that he was forced to fl ee Germany for England), Bruno Hildebrand’s National Economics in the Present and in the Future, (Hildebrand was a liberal who had to fl ee Germany for Switzerland in order to escape the death penalty), and John Stuart Mill’s Principles of Political Economy. All three books attacked the mainstream economics of the day from completely diff erent political angles for suff ering from the same weaknesses of which we accuse today’s mainstream. By attempting to make economics a much more accurate science than it merits, mainstream economics has created economic disasters: both fi nancial crisis and poverty on the periphery. All three 1848 books understood that national wealth required industrialization, recanting Ricardo’s trade theory, the very same theory which at present – in its most simplistic form – provides the basis of the world economic order that locks poor nations into a comparative advantage of being poor. John Stuart Mill – celebrated today as an important liberal (in the European sense) – acknowledged that poor nations needed manufacturing industry and recommended ‘infant industry protection.’ In a speech to Belgian workers in 1848, Karl Marx was pleased with Ricardo’s free trade theory because premature trade liberalization would create poverty and hasten revolution. Premature trade liberalization may lock nations into monoculture and undiversifi ed economic structures that prevent democracy. A nation without a large division of labour and a web of increasing returns industries is unlikely to be able to support a democratic system. Enlightenment economists and philosophers were very aware of the fact that increasing returns, industrialization and democracy go hand in hand.The long period of economic boom after World War II created a new movement towards excessive abstraction and irrelevance in economics. The fi rst countries to be hit by a wave of falling real wages


Table 2. The Present Shift in Economic Focus: Before and after ‘The 1848 Moment’:

PRE-FINANCIAL CRISIS FOCUS: POST-FINANCIAL CRISIS (‘OTHER CANON’) FOCUS:

Capital Technology and entrepreneurship

Financial economy Real economy

International trade National production

Economic models Economic facts and their contexts

Distribute capital (‘aid’) in order to eradicate poverty Distribute production in order to eradicate poverty

Perfect competition Poverty eradication needs the high wages and the capital

formation that only dynamic imperfect competition creates

Economics strongly ideologically biased. The Cold War

polarization maintained: markets are good and the state bad

and vice-versa.

Separation of analysis and ideology, ‘technocratic’ analysis

Economic activities qualitatively alike Economic activities qualitatively diff erent

Gross national product/capita Real wages

Economics as a science defi ned as the use of certain tools Economists’ toolbox makes use of any approach which is

relevant.

The market as an ideological goal The market as a tool for wealth creation

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– already from the mid-1970s – were Latin America (with the exception of Brazil). The fi nancial crisis starting in 2007 has led to a movement similar to that of 1848: the growing crisis has shattered the belief in self-regulating markets and led to a new and much more positive view of economic policy and of the role of the state.5 A recent front cover of the most ideologically liberal of all international newsmagazines – The Economist – announcing that ‘The State Goes Back into Business’6 is typical of today’s zeitgeist. The August 2010 cover is an appropriate follow-up of the same magazine’s cover of July 18, 2009, which depicted a book entitled ‘Modern Economic Theory’ melting like an ice-cream abandoned on the beach on a hot summer day. It includes the subtitle: ‘Where it went wrong – and how the crisis is changing it’. This is a true 1848 moment: as with the fi nancial crisis in 1847, economics changed completely in 1848. (Table 2) When comparing Russia with the other BRIC countries later in this paper, we shall argue that Russia’s timing in the cycle of economic theory – and the resulting economic policy – has been particularly unfortunate.

The Other Canon Approach: A Brief Description.This document is based on what we call The Other Canon Approach to economics, indicated in the right-hand column in Table 2. This is the pragmatic and experience-based type of theory to which economics return after the excesses of abstraction that cause the ‘1848 moments’ and the social havoc that accompanies them. A key feature of the Other Canon approach is that economic activities are seen as being qualitatively diff erent in terms of their ability to generate economic growth and economic development. (Figure 1) The Quality Index of Economic Activities developed by The Other Canon ranks economic activities based on their potential to generate wealth. Founded on Schumpeterian (evolutionary) and Keynesian principles, on the principles of the historical schools of economics and on the experience-based economics taught at Harvard Business School, The Other Canon approach sees economic development and high wages as emanating from a combination of three factors: technological change, increasing returns, and the synergies originating in a large division of labour. Compared to today’s economics The Other Canon represents a marked shift in focus away from trade to production, and away from perfect information as a standard and a stated goal, to Schumpeterian dynamic imperfect competition as being the goal to strive for. As in the theories of Thorstein Veblen, economic institutions are seen as being the result of the habits formed around a productive structure. Thus the arrow of causality runs mainly from changes in the productive sector to changing institutions, not – as is often assumed by the Washington institutions – that institutional change per se takes the lead. In our view institutions are best formed simultaneously with a change in a nation’s productive structure. Learning from successful Russian Strategies of the Past: Rounds I and II. Russia faced an economic challenge with the change of economic model in 1991. When Russia now faces a new challenge in whether or not to join the WTO, we argue that it is necessary to draw important lessons from what happened to Russia’s economic structure after 1991. President Medvedev has rightly called for the modernization of Russia, and we suggest that basic principles of modernization can be learned from two previous processes of modernization in Russia. In both cases we draw parallels between Russia and Germany, a nation which was also a ‘latecomer’.

5See, e.g. Mario Cimoli, Giovanni Dosi and Joseph E. Stiglitz, eds, Industrial Policy and Development, New York: Oxford University Press, 2009.

6The Economist, August 7-13, 2010.

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Figure 1. The Quality Index of Economic Activities.


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Modernizing Russia: Round I.7

Under Peter the Great (1672-1725) Russia entered a fi rst successful period of modernization, when Russia emulated the best organizational practices of western absolutism and – in particular – the economic structure of the Dutch Republic.8 Russia followed the same strategy as that recommended by the leading German economist at the time, Veit von Seckendorff (1626-1692). Just as Peter did, Seckendorff visited Holland, and came back with clear ideas that national wealth could only be produced by emulating the economic structure of that country: by creating a diversifi ed manufacturing sector – maximizing the division of labour – and thus creating the economic synergies that characterize rich countries. Seckendorff ’s textbook in economic strategy – Der Teutsche Fürstenstaat – was fi rst published in 1656 and remained in print for 100 years.9 Emulating the Dutch economic structure was what all successful countries did during the Enlightenment, with England in the lead. English economist Joshua Child opens his 1668 book with a comment on ‘the prodigious increase of the Netherlanders’ which is ‘the envy of the present and may be the wonder of all future generations. And yet, the means whereby they have thus advanced themselves, are suffi ciently obvious, and in a great measure imitable by most other nations…’10

What did the foreign visitors learn from studying Holland? First of all they learned that economic activities where qualitatively diff erent: there were ‘good’ economic activities which caused generalized welfare, and there were ‘bad’ economic activities, which caused poverty of the masses. These characteristics are outlined in Table 3. In addition it is clear that foreign observers in Holland – as Peter the Great or Veit von Seckendorff – observed important dynamic synergies that resulted from the great division of labour, the systemic eff ects that today are referred to as a ‘National Innovation System’. In Figure 2 we attempt to reconstruct what a foreign visitor would have observed in Delft in Holland at the time of Peter the Great’s visit: an innovation system built around a great division of labour between many manufacturing industries, around the navy and warfare, the production of luxury goods, and on the ‘idle curiosity’ of the scientists so typical of the Enlightenment. Modernizing Russia: Round II. A second round of modernizing Russia was the extensive industrialization presided over by the very infl uential policy-maker Sergei Witte (1849-1915), who served under the last two emperors of Russia.

7This section, and our understanding of Russian history in general, have been greatly assisted by an unpublished paper by Georgi Derluguian of Northwestern University, ‘Five centuries of Russian Modernizations’.

8On how European countries emulated the Dutch Republic at the time, see Erik S. Reinert, ‘Emulating Success: Contemporary Views of the Dutch Economy before 1800’, in Oscar Gelderblom, ed., The Political Economy of the Dutch Republic, Farham: Ashgate, 2009, 19-39.

9On Seckendorff and the economic strategies of the German states, see Erik S. Reinert, ‘A Brief Introduction to Veit Ludwig von Seckendorff (1626-1692)’, European Journal of Law and Economics, 19, 2005, 221-230.

10Quoted in Erik S. Reinert, How Rich Countries Got Rich … and Why Poor Countries Stay Poor, London: Constable, 2007.

RUSSIA AND BRIC

Table 3. Characteristics of ‘Good’ and ‘Bad’ Economic Activities.

Good (Schumpeterian) Activities Bad (Malthusian) Activities

Subject to increasing returns (industry, advanced services) Subject to diminishing returns (raw materials)

Dynamic imperfect competition ‘Perfect competition’ (commodity competition)

Stable prices Extreme price fl uctuations

Irreversible wages (‘stickiness’ of wages) Reversible wages

Creates a middle class Creates ‘feudal’ societies

Technical change leads to higher wages to the producer (‘Fordist wage

regime’)

Technical change tends to lower price to

consumer

Creates large synergies (linkages, clusters) Creates few synergies

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In principle, the industrialization process spearheaded by Witte had the same goals as that of Peter the Great, but in a very diff erent technological context (in a diff erent techno-economic paradigm). The key infrastructure at the time of Peter the Great was ships, and Peter concentrated on building the Russian navy. The key infrastructure at the time of Witte was railroads, and Witte built the Trans-Siberian railway. The principles were the same – also those listed in Table 3 – but the technological context was diff erent. Also, in the case of Witte there is a parallel with Germany, with German economist Friedrich List (1789-1846), whose texts Witte translated into Russian. We suggest in this document that today’s modernization of Russia – which we have labeled Modernizing Russia: Round III – has to follow the same principles as did rounds I and II: the factors listed in Table 3 are still very much at work, and as we shall see, the ideology that reigned during the 1990s did considerable damage to Russia’s productive structure. This is particularly evident when we compare Russia to the other BRIC countries. Russia and the other BRIC Countries.The term ‘BRIC countries’ – Brazil, Russia, India, and China – has its roots in investment banking. Goldman Sachs coined the term in 2001. The idea of large emerging economies catching up with and challenging, the West has captured the imagination of social scientists and policy-makers alike. However, the sheer size and diff erent historical legacies mean that there are enormous diff erences between the BRIC economies. Russia’s situation is in three ways unique among the BRIC countries. First, Russia was an industrialized nation long before the others. Second, it experienced unprecedented economic decline in the 1990s, and by 2008 Russia barely reached its GDP level in 1989.11 Third, unlike Brazil, China, India and in fact most of the developing world, Russia is not a member of the World Trade Organization (WTO).

11Vladimir Popov, ‘The Long Road to Normalcy’, UNI-WIDER Working Paper No 2010/3, 2010. Brazil’s own lost decade of the 1980s pales in comparison to Russia’s experience. On Brazil, see Leonardo Burlamaqui, Jose A. P. de Souza and Nelson H. Barbosa-Filho,’The rise and halt of economic development in Brazil, 1945-2004: Industrial catching-up, institutional innovation, and fi nancial fragility’, in Ha-Joon Chang, ed., Institutional Change and Economic Development. London: Anthem, 2007, 239-259.

Figure 2. Delft, Holland in the 1600s. An Innovation System based on Diversity.


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These unique features give rise to several questions, and this document seeks to (at least tentatively) answer them. First, what is the structural legacy of the decline in the 1990s in terms of technological and industrial capabilities in Russia? Second, what can and should Russia learn from the WTO experience of the rest of the BRIC economies?. We argue that while the decline of the 1990s is relatively well-known and documented on the macro-level (GDP) and more controversially in some of its micro-level and sociological impacts,12 there seems to be little awareness of the magnitude of devastation that took place during this period within Russia’s industry. Along with a massive increase in income from natural resources, a partial disintegration of the R&D system, and a greatly diminished policy capacity, the structural changes of the 1990s continue to pose grave challenges to Russia’s economic policy-making. In fact, in many areas Russia’s technological and industrial capabilities have simply been lost. In this light, the accession to the WTO presents itself as a watershed in Russia’s history similar to that of the disintegration of the Soviet Union and the subsequent reforms. The WTO agreements assume that economic activities are alike (ignoring the factors described in Figure 1 above) and consequently assume that the structural changes induced by free trade are in everybody’s interests. Economic history and recent decades – and Russia’s own experience in the 1990s – teach us that this is simply not so. Free trade tends to reinforce pre-existing structural tendencies and comparative advantages: technologically developed areas (geographical agglomerations of knowledge and production) get richer, while areas dominated by monoculture in raw materials and undiversifi ed economies experience further primitivization and retrogression. Learning from successful cases of managing industrial policy under the WTO – what the rest of the BRIC economies have long been doing – is perhaps the main issue for Russia’s economic policy-making in the near future.The other BRIC countries to a large extent owe their success to being unsynchronized with the global cyclical economics fashions that have been described in the preceding paragraphs. Since the late 1940s, India and China have consistently been following a strategy of industrialization. In the case of both India and China, the lack of competition for a long time no doubt hindered progress, but there is a growing recognition that the present successes of these countries are a result of past strategies13. As huge countries India, China, and Brazil were all subject to ‘ideological inertia’ in the sense that the neoliberal fad never penetrated as deeply as it did in the smaller nations. In contrast to the other BRIC countries, the negative eff ects of the neoliberal period caused severe and lasting damage to Russia’s productive sectors (see the fi gures in Appendix I). While the Washington institutions managed to dismantle the industrial policies of the smaller Latin American nations, BNDS – Brazil’s Development Bank – presently has a larger capital base than the World Bank. It is in our opinion important to recognize that Russia has been extremely unfortunate in relation to the fads and swings of the economics profession, and that it will take decades to repair the damage done. The decline in GDP and output experienced by Russia, and by all other former Soviet republics and to a lesser degree Central European economies, in the 1990s is relatively well documented and undisputed. According to the World Bank’s calculations, the recession these countries went through in the 1990s was in most cases worse than the Great Depression in the USA and World War II in Western Europe (in both cases, the countries aff ected recovered considerably quicker).14 In the case of Russia and the other BRIC countries, Figure 3 depicts the well-known dynamics of GDP growth over the last half century. Behind such a drastic fall in GDP are similar dynamics in terms of value added produced by industry and by other sectors. Figures 11-27 in Appendix 1 show the rapid fall in value added produced particularly

12See, for perhaps the most infamous discussion of the impacts of Russia’s privatization policy during 1990s the article by Lawrence King, David Stuckler and Martin McKee, ‘Mass privatisation and the post-communist mortality crisis: a cross-national analysis’, The Lancet, 373, 9661, 399-407, January 2009.

13In the case of India, see Deepak Nayyar, ‘Learning to Unlearn from Development’, Oxford Development Studies, 36 (3), 2008, 259-280.

14World Bank, Economic Growth in the 1990s: Learning from a Decade of Reform, 2006, available at http://www1.worldbank.org/prem/lessons1990s/.

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in industry, and continuous lowering well into the 2000s as in the case of the share of high and medium technology value added in manufacturing. This is in stark contrast to the rest of the BRIC economies as well as with dynamics in leading catching-up economies such as South Korea, not to speak of leading developed countries such as the USA and Japan.Russia’s prowess in sciences, particularly mathematics, is proverbial. Indeed, if we take a snapshot view of the knowledge intensity of the BRIC economies – in terms of patents fi led and money paid and received for knowledge transactions – Russia is doing rather well, as shown in Figure 4. In fact, Russia is not only outperforming all the other BRIC economies but also Eastern European members of the European Union. However, zooming out and taking a long-term view reveals a more complex picture, depicted in Figure 5.While Russia, along with Brazil and India, has been able to rapidly increase its share in world exports, its share in knowledge economy is in fact not increasing at an equal pace. South Korea and China are able to climb what we can call a knowledge ladder: exporting a signifi cant amount of their respective outputs and simultaneously rapidly increasing the knowledge intensity of the economy. Moreover, Russia’s growth in exports is mostly due to a rise in fuel exports (see Figure 14 in Appendix 1) and in terms of a science base (measured here in a very robust way, in a number of scientifi c articles),15 Russia has in fact been rapidly losing ground to the other BRIC economies (Figure 15).16

15See also a recent OECD report on Russia’s innovation system, National Innovation System and State Innovation Policy of the Russian Federation. Background Report to the OECD Country Review of the Russian Innovation Policy, OECD, 2009.

16For a most recent comparison of BRICS (including South Africa) innovation and R&D systems, see José Eduardo Cassiolato and Virgínia Vitorino, BRICS and Development Alternatives. Innovation Systems and Policies, London: Anthem, 2009. On the transition of the Russian R&D system, see Slavo Radosevic, ‘Patterns of preservation, restructuring and survival: science and technology policy in Russia in the post-Soviet era,’ Research Policy, 32(6), 1105-1124, 2003.

Figure 3. GDP per capita in 1990 international dollars, 1950-2008.


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After the tumultuous 1990s, Russia has thus generally developed in the opposite direction of the other BRIC and leading catching-up economies: exports are undiversifi ed, the share of high and medium technology production is diminishing, and losing ground to the other countries in terms of knowledge production.There are more or less three broad explanations typically given for the rapid collapse of Russia’s GDP in the 1990s. Two of the explanations spring from the same ideological well, neoclassical economics cum Washington Consensus policies. First, it is argued, Russia’s trouble originated in the profound mismanagement of the macroeconomic environment, particularly in the inability to tame inflation. 18 Secondly, the transition from planned economy to market economy was protracted and undermined by continued trade controls (export quotas and import substitution).19 A third argument looks at long-term institutional development in Russia and argues that Russia’s domestic institution building has always been complicated by copying Western solutions without heeding domestic needs, and that shock therapy essentially threw out the baby with the bathwater: non-functioning markets dismantled feeble institutions and undermined state capacity in the process.20 None of these, however, explain why Russia is still lagging behind other BRIC and leading catching-up economies. In what follows, we offer an alternative understanding of

17Data for patents are for 2006 and include all fi lings around the world; data for royalties and licenses are for 2008 and include both payments and receipts. Royalties and license fees include international payments and receipts for the authorized use of intangible, non-produced, non-fi nancial assets and proprietary rights (such as patents, copyrights and industrial processes and designs). Hungary is excluded from Eastern European calculations as it has a very high level of royalty and licensing fees in GDP (1.99%).

18Jeff rey Sachs, ‘Why Russia has failed to stabilize’, 1995, available at http://www.earth.columbia.edu/sitefi les/fi le/about/director/documents/russia1995.pdf.

19Vladimir Konovalov, ‘Russian Trade Policy’, in Constantine Michalopoulos and David G. Tarr, eds, Trade in the New Independent States, The World Bank/UNDP, 1994, 29-51.

20Vladimir Popov, ‘The Long Road to Normalcy’, 2010.

Figure 4. Snapshot of knowledge intensity, 2008.17

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what happened to Russian industry in the 1990s. We look at Russian economic dynamics through evolutionary and Schumpeterian Other Canon lenses.While some key neoclassical thinkers argue for an important role for industrial and technology policy in development,21 there is still one key aspect in which industrial policy is often misunderstood, namely the role of technology in development.22 More specifically, there are strong disagreements as to what causes and stimulates innovations in the private sector. On the one hand, the evolutionary tradition argues that innovations and economic growth in general take place because of knowledge and skill agglomeration and continuous upgrading and technological change. On the other hand, the neo-classical and also public-choice traditions argue that the main drivers behind innovations and growth are trade and competition: the former using the comparative advantage of nations to bring more, better and cheaper goods to consumers (higher efficiency); the latter creating pressures for companies to incessantly innovate and outcompete the competitors, and to push prices down in the process (higher efficiency, again). This difference goes back to a different understanding of the nature of technological development and its impact on companies and economies. The evolutionary school argues that technological development is almost always path-dependent; neo-classical arguments assume that technology is essentially freely available to all, competitors and countries alike. The neo-classical view also assumes that technological development is more or less linear, towards ever more complex solutions yet with a rather clear path ahead. Thus,

21Dani Rodrik, One Economics, Many Recipes. Globalization, Institutions, and Economic Growth, Princeton, NJ and Oxford, UK: Princeton University Press, 2007.

22Mario Cimoli, Giovanni Dosi, Richard Nelson and Joseph Stiglitz, ‘Institutions and Policies Shaping Industrial Development: An Introductory Note’, LEM Working Paper Series, 2/2006, 2006, available at http://www.lem.sssup.it/WPLem/fi les/2006-02.pdf.

Figure 5. Knowledge ladder: Patents vs Share in World Exports (Goods and Services), 1996-2008.


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while neoclassical economists set out to rectify market failures that prevent the dissemination of technologies and skills, in the eyes of evolutionary economists, entrepreneurs seek technological innovation in order to create market failures. To evolutionary economists, technological development is anything but linear and technology is anything but freely available. Path dependencies, linkages, spillovers, externalities, winner-takes-all markets and highly imperfect and dynamic competition make technology an unpredictable, high-risk and possibly high-return endeavor. These characteristics engender long-term structural changes in the economies in form of technology trajectories, techno-economic paradigms and geographical agglomerations. Following a broadly evolutionary approach, we assume that companies innovate in order to hedge their balance sheets. That is, companies innovate in order to generate revenues and outcompete their competitors, and they do so in a number of ways, e.g. by developing new or improved products and services, or by introducing organizational or marketing changes, and in other ways. In trying to hedge their balance sheets through innovations, companies rely on skills and procedures they have developed, or as Alfred Chandler called this, companies rely on ‘learned organizational capabilities’ that include technical know-how, management and marketing skill, established networks, and other mechanisms.23 These capabilities, however, develop and evolve in a wider context which can be called a national system of innovation that can have a huge variety of features, from a legal system to a particular education and R&D systems.24 In the early 1990s the Washington institutions assumed that Russia needed to deal with two fundamental challenges of transition: to align domestic prices with world markets and to restructure the Soviet industry. While liberalization of prices and tariff s25 was supposed to deliver the fi rst, restructuring was to take place through processes of import spillovers and externalities.26 The argument rested on the logic that foreign investors bring with them new technology and skills that in turn force domestic producers to imitate the foreign competitors and in the process upgrade their own respective technological and production capabilities. However, as rapid liberalization threatened and also in reality resulted in high infl ation and rapid fall in ruble value in the early days of the transition, import externalities could not take place, as domestic products were massively cheaper. Thus, upon the advice of the Washington institutions, Russia embarked on stabilization through exchange rate appreciation in order to both curb infl ation and raise competitiveness of imports to promote industrial restructuring.27 From the evolutionary Other Canon viewpoint this was, however, bound to lead to a catastrophe for domestic producers. Soviet industrial companies, and the industry in general, were built up and ran in a complex cluster-like web of planning and competition; the production was generally highly vertically integrated. Perversely mirroring the cluster-like characteristic of Soviet industrial activities, the R&D system was based on similar vertical integration of R&D into specialized institutions that were, however, separated from the production companies. With the liberalization of prices and trade in January 1992, and as government planning of production and distribution ceased to exist, most companies saw drastic drops in their exports to other former Soviet republics and Central European economies.28 While raw materials based exports proved relatively resilient

23Alfred Chandler, Inventing the Electronic Century. The Epic Story of the Consumer Electronics and Computer Industries, Cambridge, MA: Harvard University Press, 2005; and Richard Nelson and Sidney Winter, An Evolutionary Theory of Economic Change, Cambridge, MA: Harvard University Press, 1982.

24Chris Freeman, The Economics of Industrial Innovation, London: Routledge, 1974.

25Tariff s, however, played a relatively minor role in the early transition period, being kept low around 12% on average and only in 1994 some tariff s rose rapidly (car production, agriculture, defense); see Konovalov, ‘Russian Trade Policy’, 1994, 30 and 39-40.

26Dani Rodrik, ‘’Disequilibrium’ exchange rates as industrialization policy’, Journal of Development Economics, 23(1), 89-106, 1986.

27See summary of arguments in Vladimir Popov, ‘Recovery and adjustment after the Russian 1998 currency crisis’, in Jayati Ghosh and C.P. Chandrasekhar, eds, After Crisis - Adjustment, Recovery and Fragility in East Asia, New Dehli: Tulika, 2009, 245-269

28Konovalov, ‘Russian Trade Policy’, 1994, 34, table 2.3.

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in 1992-1993, Russian machinery exports dropped from 13 billion USD to 5 billion USD.29 At the same time relatively recent capital investments in new production technology were rather common for Russian companies: in 1990, in the machinery sector, more than 50% of the production technology was less than 5 years old.30 That means most of these companies had a large amount of capital investments that they could not yet amortize and thus the companies with the highest relative fi xed costs to variable costs (these tend also to be the technologi-cally most advanced ones) were hit the hardest as their balance sheets worsened very quickly. If a company has a lot of machinery and equipment to be amortized, (i.e. there have been recent investments into upgrading) this company will be particularly harshly hit if its demand drops and it comes under fi nancial stress because of liabili-ties to the banking sector. Thus, by defi nition, the most advanced industries were hit fi rst and also hardest by the free trade shock (i.e. by rapid liberalization). This is called the Vanek-Reinert eff ect: a free trade shock will kill the most advanced sectors in the least advanced trading area fi rst. The last to survive will be subsistence agriculture. In addition, as demand disappeared, particularly in the former Soviet trading area, it meant that most in-dustrial value chains and all-important linkages between diff erent producers collapsed. Linkages between producers, also called innovation pathways, simultaneously enforce and enable companies to learn new ways of producing things, by experimenting and consequently improving their processes and products. Once these linkages, collapse rebuilding them is almost impossible because of labour mobility, loss of knowledge because of idleness, and because entrepreneurs move into activities with higher profi t poten-tial which may, however, not exhibit similar development potential as technologically-based activities. However, as we can see in Figure 6, the Vanek-Reinert eff ect was made much worse in Russia by the exchange rate appreciation during 1993-1995. Obviously, this appreciation made imports much more competitive, as retail sales hardly changed throughout this period. And at the same time it made do-

29Ibid., 36.

30Narodnoe Hosjaistvo SSSR v 1990 g., Moscow, 1991, 316.

Figure 6. Exchange rate (right axis), real wages and production in Russia, 1992-2001.


15

mestic producers lose their competitiveness. Figures 11-26 document the unprecedented fall in pro-duction (both in industry and agriculture) in Russia in the 1990s. These fi gures illustrate the signifi cant dynamics inherent in Russia’s economy up to the late 1980s: almost all economic activities experienced strong growth in output. This was followed by an astonishing fall of production in most sectors and, as the fi gures show, some activities became virtually extinct. However, this also means, that not only did production and employment fall radically in sectors with high learning potential, but the ‘pathways of innovation’ collapsed. In other words, the Russian National Innovation System was severely damaged. Figure 7 shows the direct link between the overvaluation of the rouble and the damage done to the productive sector.It is clear that the 1998 fi nancial crisis and the devaluation of the rouble helped local producers regain some of their competitiveness. Also, Russian economic policy has changed considerably since the early 1990s. This policy evolution can be divided into three periods starting in 1990. First, 1992-1998, the period of destructive destruction documented above. Second, 1998-2004, a period we call “the gilded recovery,” as devaluation enabled some of the production to pick up again, also tariff policy clearly helped in some fi elds (e.g. car production, poultry), and the rise in global energy prices fl ooded Russia with petrodollars. But this period is also characterized by rapidly falling real wages – and consequently a collapse of overall demand – and rapid growth in income inequality while social indicators continued worsening (e.g. the hu-man development index31). The third period, starting with Vladimir Putin’s fi rst presidency in 2004, can be seen as an area of emerging state capitalism or, particularly after 2008, as neo-developmentalist.32 While Putin during his fi rst term actively sought Russian membership in the WTO, his second term as president

31See Popov, ‘Recovery and adjustment’, 2009.

32Rawi Abdelal, ‘The Promise and peril of Russia’s resurgent state’, Harvard Business Review, Jan-Feb, 2010, 1-6.

Figure 7. Russia's industrial production before and after devalation in 1998.

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brought a marked change, not only rhetorically but also in terms of actual policy. Indeed, Putin’s Russia has been ’accused’ by neo-liberalists of pursuing industrial policy.33 It appears that Russia is consciously delay-ing its entrance into the WTO agreements; instead, Russia is set to experiment with various industrial policy means such as priority industrial sectors, local content requirements, public procurement for innovation, import tariff s, and more. However, from the destructive destruction of 1992-1998, Russia has inherited an industrial sector with particular capabilities. In order to understand the dynamics of how Russia’s industrial capabilities – capabilities for innovation – have evolved over the past decades, it is useful to compare these to other BRIC economies. Figure 8 attempts schematically to summarize these comparative dynamics.In comparison to the other BRIC economies, Russia saw particularly its production and R&D capabilities forging ahead of the rest up to the mid or late 1980s. Chris Freeman and Carlota Perez have argued that the Soviet industrial system coped relatively well with the mass production paradigm that came to be exhausted by the early 1980s.34 The switch to the information technology led production paradigm, based as it is on production and innovation networks, was something that the Soviet planning system could not cope with. This shock therapy meant that the other BRIC economies rapidly started catching up with Russia, and in particular in their production and export capabilities eclipsed Russia within a decade. While Russia still enjoys relatively strong R&D capabilities, as we saw above, the dynamics speak clearly for the other BRIC economies, and not for Russia.While it is noticeable that other BRIC countries are parties to WTO agreements, it is more than signifi cant that especially India and China never really succumbed to the Washington Consensus-type policies.

33Anders Åslund, ‘Why doesn’t Russia join the WTO?’, The Washington Quarterly, April 2010, 49-63, available at http://www.twq.com/10april/docs/10apr_Aslund.pdf.

34Chris Freeman, ‘The ‘National System of Innovation’ in historical perspective’, Cambridge Journal of Economics, 19, 1995, 5-24; and Carlota Perez, Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages, Cheltenham, UK: Edward Elgar, 2002.

35Under production capabilities we mean such features as diversity and clustering of production, feedback linkages among producers, inter-sectoral linkages, etc; by R&D capabilities we mean both tacit and codifi ed knowledge creation (patents, articles, product development networks); and by export capabilities we mean both volume and diversity of exports.

Figure 8. Evolution of Russian industrial and technological capabilities in relation to the rest of the BRIC economies.35

Capa

bilit

ies

R&D capabilities

Export capabilities

1970–1990 1990–1998 1998–

Production capabilities


17

Indeed, also within the WTO, China and India, and increasingly also Brazil, have become powerful countries with their own clear agenda that they are also increasingly able to push through. So, for instance, all three countries have made signifi cant changes to their intellectual property laws that, while WTO-(that is, TRIPS) compliant, give important advantages to domestic producers.36 Similarly, India and China, less so Brazil, have been noticeable exceptions in not allowing total freedom for foreign investors and capital movement.37 In other words, the other BRIC economies have been rapidly learning how to reap the benefi ts from WTO membership and at the same time generate policies for domestic capabilities building. This is something that Russia has seemingly not yet learned how to do. In light of the above analysis, Russia is well advised to take up more seriously an industrial policy aimed at domestic expansion. The challenges faced by Russia are by no means unique. Indeed, it can be argued that most catching-up economies today face similar challenges that can be summarized under the heading of diminishing returns from integration into the global economy. Figure 9 shows that outside the West, only Asia has escaped rapidly falling growth rates following the introduction of the Washington Consensus policies. Even in highly innovative fi elds such as information and communication technologies, catching-up country innovation hubs (technology parks, production agglomerations, etc) may experience diminishing returns to network integration. In electronics, for instance, ‘Asian labs remain focused primarily on repetitive detailed engineering and product development tasks.’38 In other words, despite

36Jerome H. Reichman, ‘Intellectual Property in the Twenty-First Century: Will the Developing Countries Lead or Follow?’, Houston Law Review, 46(4), 2009.

37José Antonio Ocampo and Joseph E. Stiglitz, eds., Capital Market Liberalization and Development, Oxford: Oxford University Press, 2008.

38Dieter Ernst, A New Geography of Knowledge in the Electronics Industry? Asia’s Role in Global Innovation Networks, East West Center, Policy Studies, No 54, 2009, 29.

Figure 9. Development Economics lost. Growth rate of GDP per capita in selected world regions; regional average in selected periods between 1820 and 2001; annual average compound growth rate.

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growing high- tech exports and R&D expenditures, many catching-up countries may experience ‘commodifi cation’ (perfect competition, which makes it diffi cult to maintain high wages). Indeed, catching-up and developing countries might both seem to industrialize (measured by an increasing share of industry in GDP) and catch up technologically (measured by a raising share of ‘high tech’ exports), yet none of these indicators necessarily imply an increased capacity to develop, and to pay higher real wages. This is because domestic linkages may remain weak, while intense global competition keeps wages and profi ts low. To the contrary, there seems to be evidence of emerging high-tech innovation enclaves in developing countries which create few linkages and synergies with other domestic actors (industry, research labs and the public sector). Such tendencies repeat themselves in a host of catching-up economies, from Estonia to Mexico. This, perhaps, is the strongest reason why the Washington Institutions again are talking about industrial policy. Trade, foreign investments and openness are simply not enough to deliver sustainable growth in terms of technology, employment, high wages, and fi nance.Industrial policy came to be discredited in the 1980s by juxtaposing two seemingly different development traditions: East Asia’s rise and Latin America’s retrogression starting in the mid-1970s (the so called ‘lost decades’ of Latin America). However, this was only possible by showing two things. First, East Asia’s rise was based on classical Ricardian comparative advantage, using exports as an ‘engine of growth.’ Second, Latin America’s problems had its roots in failed or at least mismanaged import substitution industrialization closely related to classical development economics. In both cases, this was only one side of the coin: exports were only a part of the success story in East Asia’s rapid rise, and rather than import substitution per se, it was the free trade shock – foreshadowing what would hit Russia about 15 years later – that destroyed the productive sectors of the small Latin American countries. East Asia’s story has been told in a way as if feedback linkages and positive externalities emerging in these economies through state-led industrialization played only an exogenous role in these countries’ development. That is, because technology and innovation were simply left out of the story it was possible to draw a rather simplistic conclusion: export-led growth is what works in developing countries. Latin America’s problems, in turn, were seen through a double prism of infl ation and rent-seeking, without, however, realizing that increasing foreign private lending in the 1970s also spurred the consumption engine into higher gear while domestic production collapsed due to a free trade shock. This was bound to lead to current account problems (through imports) and eventually towards long-lasting fi nancial fragility that undermined industrialization eff orts, not the other way around. That is, the role of the post-Bretton Woods international fi nancial architecture was ignored and, in fact, together with the newly learned ‘lessons’ from East Asia about export-led growth, fi nancial liberalization was seen as the main source of the much-needed capital for the export-led growth model. Signifi cantly, both misinterpretations marked a break with a long-standing development tradition reaching back to the Renaissance39 – that was, however, also supported by many, if not most, neo-classical economists at the time – namely, that infant industry protection is a necessary, if not suffi cient, condition for industrialization and diversifi cation. Also John Williamson’s original list of Washington Consensus policies did include infant industry protection, and ‘a moderate general tariff (in the range of 10 percent to 20 percent, with little dispersion) might be accepted as a mechanism to provide a bias toward diversifying the industrial base without threatening serious costs.’40

39Erik S. Reinert, How Rich Countries Got Rich … and Why Poor Countries Stay Poor, London: Constable, 2007.

40John Williamson, ‘What Washington Means by Policy Reform’, available at http://www.iie.com/publications/papers/paper.cfm?ResearchID=486, 2002 (updated version of his 1990 article).


19

With these misinterpretations, however, not only were real developments misunderstood, equally important is to note that comparing East Asian and Latin American development experiences yields key lessons about the success and failure of industrial policy. More precisely, perhaps the key lesson is that protectionism does not equal protectionism: just as there is a huge variety of capitalisms, protectionism can also take many forms. If development history teaches us that infant industry protection is a conditio sine qua non, then it is exactly the comparison of two very recent instances of this strategy that can teach us the reasons for success and failure. Indeed, based on these two historical experiences, we can create two ‘ideal types’ of protectionism and, more importantly, of industrial policy. In Table 3, we try to distill from vast and diverse historical data and diff erent contexts two such ‘ideal types’.Comparing the two, it is clear that the key diff erences between these ‘ideal types’ rest on the following: First, the idea that development needs specifi c economic activities that exhibit long-term potential in terms of learning curves, dynamic imperfect competition, increasing real wages home-market expansion and exports. Such activities provide synergistic increasing returns nationwide . These, in turn, create possibilities for continuous upgrading through policies targeting education and the labor market. This is what East Asian countries did. Latin American countries in the mid-1970’s (with the exception of Brazil), on the other hand, failed to target windows of opportunity in diff erent activities while the need for local competitive pressure was underestimated. Second, the failure to create dynamic economies of scale led to fi nancial fragility, particularly when foreign capital infl ows and lending became prevalent elements in the development strategy, as happened in Latin America in the 1980s. Combined with the basics of the current ICT-led techno-economic paradigm, the lessons from previous successful instances of industrial policy should form the core of the emerging Russian developmental state.A key feature of the developmental state is its fi nancing of development. While the fi nancial system will in general evolve with changes in technology, these changes will not necessarily be those most appropriate

Table 3 . Ideal types of protectionism compared

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20

to support technological development. Fostering the appropriate innovation in the fi nancial structure should be part of government technology policy. Generally the fi nancial system is regulated in order to provide fi nancial stability or to control infl ation. However, this overlooks the most important role of the fi nancial system in the implementation of technological development.41 Governments regulate the fi nancial system and task central banks to provide growth of employment or stability of prices but seldom take measures to ensure that the fi nancial system provides the support for technological development that is the very foundation of economic stability and development.One means of fostering these changes is through the creation of a national development bank that can provide support for private sector risk-taking by fi nancial institutions. An alternative that is followed in the United States is for government departments interested in technological development to form independent venture capital funds that support the best technological designs in the required area.42 An important part of this support is not only the provision of fi nancing, but also ensuring the commercial viability of the enterprise that produces the desired technological development. This support can include a guaranteed purchase but also help in developing a commercially viable product that can sustain the enterprise in addition to government fi nancial support. In this way the private sector provides fi nancial support for targeted areas of development. Obvious areas for such policies are in national defense, energy policy, environmental investments, and public procurement in general.

Conclusion.This document has argued that – both compared to the country’s past and its vast possibilities – Russia’s economy produces far from its theoretical Production Possibility Frontier, i.e. the point where all the

41Jan A. Kregel and Leonardo Burlamaqui, ‘Banking and the Financing of Development: A Schumpeterian and Minskyian Approach’, in Silvana de Paula and Gary A. Dimsky, eds, Reimagining Growth – Towards a Renewal of Development Theory, London and New York: Zed Books, 2005, 141-167.

42Fred Block, ‘Swimming Against the Current: The Rise of a Hidden Developmental State in the United States’, Politics & Society, 36(2), 2008, 169-206.

Figure 10. Russia’s Production Possibility Frontiers.


21

nation’s factors of production, capital, labour and brainpower are fully utilized. The graphs in Appendix I show this convincingly. This idea is represented in Figure 10, where the solid outer line represents the potential output, and the dotted inner line represents Russia’s present situation. This situation creates a very strong argument for heavy industrial policy, also in the neo-classical economic tradition on which neoliberalism built. Any economic strategy must learn from the destructive destruction that took place in the 1990s (see Figure 3) but also from the success stories. For example, what lies behind the spectacular recent success of the Russian poultry industry (Figure 15, in Appendix I)? How can this success be replicated in other areas of industry and agriculture? The analysis must be based on the shift in priorities which is outlined in Table 2 in the document: a new emphasis on the production of goods and services, away from the focus on fi nance and trade.Emphasis must be made on learning from actual policy experiences of other countries, not on the ideologies ‘sold’ by these countries. In other words: ‘Don’t do what the Americans tell you to do, do what the Americans did’. In Appendix II we have listed ‘Ten Theses for a New Developmentalism,’ which as part of a project funded by the Ford Foundation was recently produced by a group of economists meeting in São Paulo. This list is useful in a Russian context because it in many ways represents the antithesis of the Washington Consensus that wreaked so much havoc in Russia’s productive sectors in the 1990s. This document is just a preliminary report to a larger project, so our key recommendations are outlined only as bullet points below:

Income diff erences between individuals are largely determined by the choice of economic activity. • Surgeons have higher income than hospital cleaning ladies. The same mechanisms are at work between nations: what the nation produces will to a large extent determine its relative level of income. Figure 1 and Table 3 in this report outline the diff erences between activities that are ‘good’ and those which are ‘bad’ for a nation. Any effi cient industrial policy must bear these elements in mind. The present production profi le of Russia’s industry is of a kind which under increased free trade creates • a high risk that the Russian population at large may specialize in staying relatively poor. This means that, in the opinion of the authors, Russia is not ready for a WTO membership. However, a • free trade area with Russia’s neighbors is likely to produce benefi ts to all parties (in Asian development terminology, this could create a ‘fl ying geese’ pattern of development).Russia’s modernization – we have called it ‘Modernization Round III’ – must be based on the same • principles of Russia’s two previously successful modernization strategies, those of Peter the Great and Sergei Witte, but once again taking the new technological context (the techno-economic paradigm) into consideration. Russia ought to establish a detailed and targeted industrial policy (see also the policy outline in • Appendix II) that aims at replicating successes, for example that of the poultry industry. A detailed study of Russian imports should be established in order to pinpoint areas where a minimum of policy (and tariff ) intervention is likely to produce a maximum eff ect in terms of employment and national added value. A vast country like Russia must have policies both for high-tech, medium-tech, and low-tech industries. • Denmark is an example of a country which has created employment and value in relatively low-tech industries within a high-tech setting.The housing sector appears to be a candidate for a large-scale innovation-based public initiative; this is • also true for energy effi ciency.The regional dimension needs particular emphasis. A country embracing nine time zones needs strong •

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22

regional policies. Regional policy is very important within the European Union. On an EU map of Europe more than 90 per cent of the geographical area receives some kind of regional subsidy. As has been done in the United States, the regional aspects could be studied in the form of cluster analyses. Europe and the United States have themselves not followed the strategies that their economists recommended in Russia. Selective strengthening of the agricultural sector must be given priority. Regional policy depends • on the presence of an agricultural sector. The relatively good performance of Poland compared to its neighbors, e.g. the Baltic countries, is partly due to a private agricultural sector which provides a buff er – reducing open urban unemployment and social exclusion – when industrial activities fl uctuate. As shown by the examples of Peter the Great and Sergei Witte, infrastructure is a key element in any • national modernization. Building a national and international network of high-speed railways seems to be the best candidate. Russia needs to establish a strong development bank that can be the executive branch of the • development strategy and handle the needs of large, medium size, and small producers. We recommend Brazil’s BNDS as a role model. At present this Brazilian development bank handles more funds than the World Bank.While the gas and petroleum sector provides very useful foreign exchange, there is the risk that • this sector may hamper the long-term development of the country. The risk of an overvalued ruble that makes Russian industry non-competitive internationally is only one of the risks associated with the group of problems often referred to as ‘Dutch Disease.’ Norway and its emphass on fi nancial investment instead of investments in the nation’s own productive sector is decidedly an example not to follow in this case. It must be attempted to link the excellent scientifi c production in Russia to commercial production • in Russia itself. A conscious brain-gain policy (promoting the return of skilled emigrants) – for a while successfully tried in Ireland and Taiwan – could be part of this strategy. Entrepreneurship must be taught and encouraged at all levels. Historically – starting with England in • the 1500s – foreign entrepreneurship has proven to be much more important that foreign capital. In the context of development policies in Latin America, American economist Albert Hirschman coined • the term Fracasomanía, meaning the tendency in several Latin American countries to picture their own destiny as one of automatic fracasos, or failures. This is a kind of economic nihilism. Fracasomanía, in-cluding giving in to the destructive forces of corruption, is one trap Russia must avoid. It is important to keep in mind that although China and Zimbabwe achieve virtually the same score on the corruption index, one country is developing very rapidly while the other is retrogressing economically. Fracasomanía must be avoided, together with the idea that only two policy possibilities exist, planned • economy or neoliberalism. In reality, there are virtually endless alternative varieties of capitalism, and it should be kept in mind that the two irrational political extremes – planned economy and extreme liberalism (today’s neoliberalism)– were both declared dead by the continental European economists who created the welfare state more than 100 years ago. In spite of this, these two irrational utopias have continued to haunt Russian policy-making until today.


23

APPENDIX I.

Figure 11. Manufacturing value added per capita, 1993-2003 (Korea is plotted on right vertical axis).

Figure 12. Share of high and medium technology value added in manufacturing value added, 1993-2003 (%).

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24

Figure 13. Value added by sector, Russia, 1990-2008

Figure 14. Share of Fuel Exports in Merchandise Exports, 1996-2003 (%).


25

Figure 15. Number of Scientifi c Articles, 1993-2005.

Figure 16. Russian production of meat, 1970-2008; 1970=100; thousand tons.

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26

Figure 17. Russian production of fl our, grain and bakery products, 1970-2008; 1970=100.

Figure 18. Russian production of poultry, semi-processed meat and sausages; 1970 = 100.


27

Figure 19. Russian production of alcoholic beverages and cigarettes; 1970=100.

Figure 20. Russian production of textiles; 1970=100

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28

Figure 21. Russian production of coke, oil, gasoline and diesel fuel; 1970=100.

Figure 22. Russian production of chemicals and medicine; 1970=100.


29

Figure 23. Russian production of machinery; 1970=100.

Figure 24. Russian production of electrical domestic appliances; 1970=100.

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30

Figure 25. Russian production of trolley buses, cargo vehicles, cars and buses; 1970=100.

Figure 26. Russian production of agricultural produce; 1970=100.


31

Figure 27. Russian livestock population; millions.

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32

APPENDIX II.TEN THESES ON NEW DEVELOPMENTALISM On May 24 and 25 of 2010, a group of economists sharing a Keynesian and structuralist development macroeconomics approach convened in São Paulo to discuss ten theses on New Developmentalism, the name that some of them have been using for some years to describe the national development strategy that middle income countries are today using or should use to promote development and economic catching up. The meeting was part of the Financial Governance and the New Developmentalism project, fi nanced by the Ford Foundation. The project has as its background the failure of the Washington Consensus to promote growth in Latin America and the 2008 Global Financial Crisis that showed the limits and dangers involved in fi nancial globalization and fi nancial deregulation. The workshop was held in the aftermath of the biggest fi nancial crisis in history in which the impact of open capital markets on exchange rates and the prices of tradable goods was evident . The G20 and individual countries are now working toward the required regulation of fi nancial markets. Given that and the repeated fi nancial crises in middle income developing countries, the general objective of the workshop was to evaluate how eff ective a new developmentalism strategy might be in promoting growth with stability. The specifi c objective was to discuss ten theses on new developmentalism that participants had been asked to think about in advance of the meeting. After two days of lively discussion, the local organizers of the workshop were charged with editing the theses to refl ect the debate. The fi nal version has now been endorsed by the original participants of the workshop. Other economists and social scientists committed to the idea of economic growth with stability and social equity are now also invited to subscribe. 1. Economic development is a structural process of fully utilizing all available domestic resources to provide the maximum sustainable rate of capital accumulation building on incorporation of technical progress. The primary objective is to provide full employment of available labor resources. Not only should this involve increasing productivity in each industry, it also involves fi nance and the continuous transfer of labor to industries producing goods and services with higher value added per capita and paying higher wages and salaries. 2. Markets are the major locus of this process, but the state has a strategic role in providing the appropriate institutional framework to support this structural process. This includes promoting a fi nancial structure and fi nancial institutions that channel domestic resources to the development of innovation in sectors that produce high rates of increase in domestic value added. This framework should also include measures aimed at overcoming structural imbalances and promoting international competitiveness. 3. In the context of globalization, economic development requires a national development strategy which seizes global opportunities i.e. global economies of scale and multiple sources of technological learning, mitigates barriers to innovation created by excessively strong intellectual property regimes, assures fi nancial stability, and creates investment opportunities for private entrepreneurs. 4. Although the Schumpeterian side of the development process and strategic industrial policy are relevant, the demand side is where the major growth bottlenecks unfold. Since Keynes, it has been widely recognized that supply does not automatically create demand. However, in developing countries there are two additional structural tendencies that limit demand and investment: the tendency of wages to increase at rates below the growth of the productivity, and a structural tendency to overvaluation of the real and/or nominal exchange rate. 5. The tendency of wages to increase more slowly than productivity growth is due to the existence of an abundant supply of labor and of the political economy of labor markets. Besides limiting domestic


33

demand and reinforcing income concentration in the higher classes, this tendency can also aff ect long term productivity growth negatively. A legal minimum wage, cash transfers to the poor, and principally a government guarantee to provide employment at a living wage could be used to neutralize this tendency to underpay labor. The alternative – chronic overvaluation of the national currency that increases purchasing power– is not a sustainable strategy. 6. The tendency toward cyclical overvaluation of the exchange rate in developing countries has been due to both the excessive reliance on external savings in the form of foreign capital fl ows and the Dutch disease in the context of excessively open capital markets and lack of appropriate regulation. This tendency implies that the exchange rate in developing countries is not just volatile, but it also contributes to recurrent currency crises and recurrent bubbles in the fi nancial markets. It also implies that export-oriented investment opportunities are chronically insuffi cient because exchange rate overvaluation renders even the most effi cient business enterprises uncompetitive internationally. 7. Dutch disease may be characterized as a permanent overvaluation of the national currency due to Ricardian rents originating from the export of commodities based on natural resources or exports based on ultra-cheap labor. Dutch disease impedes other tradable industries from prospering. It does so by creating a wedge between the “current account equilibrium exchange rate” (the exchange rate that balances the current account) and the “industrial equilibrium exchange rate” – the exchange rate that allows tradable industries to be competitive utilizing state-of-the-art technology. 8. Economic development should be fi nanced essentially with domestic savings. In order to achieve this goal, the creation of public fi nancial institutions to ensure full utilization of domestic resources, in particular labor, fi nance innovation and support investment is required. The attempt to use foreign savings via current account defi cits usually does not increase the investment rate (as claimed by orthodox economics), but instead increases domestic indebtedness and reinforces fi nancial instability. Growth strategies that rely on foreign savings cause fi nancial fragility; get governments caught up in regressive “confi dence building” games; and, all too often end with a balance of payments or currency crisis. 9. In order to provide the appropriate framework for development, the government must ensure a stable long term relation between the public debt and GDP and a real exchange rate that takes account of the need to counter the adverse eff ects on the manufacturing industry of Dutch disease. 10. To achieve long term development, economic policies should pursue full employment as its primary goal, while assuring price and fi nancial stability. These ten propositions are not intended to be a comprehensive recipe for development. Rather they are intended to be a set of propositions that a wide array of economists can subscribe to. These propositions should be adjusted according to a proper mix, specifi c to each domestic productive, social and political context. Nothing has been said about the global fi nancial and trade architecture which are clearly matters that need attention in the new environment of globalization that binds economies so closely together, often in forms of adverse competition.

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In the words of Vladimir Lenin, “Today Russia is pregnant with modernization”. It is unclear, however, so far whether or not the we will see the birth of this child, nor is it clear if he’ll be born strong and healthy. This report seeks to determine under which economic conditions we can say: “Yes, modernizing has already

begun in this country. We understand what we do and why we undertake these changes, and, if we are persistent enough, we will succeed.” First, let’s attempt a defi nition of the phenomenon called ‘modernizing’. In our opinion, it is a planned and managed process of socio-economic transformation of any country with the active introduction of mod-ern economic forms and technologies into economics. The timetable-bound nature and manageability distinguish modernizing from a revolution. The most recent Russian democratic revolution of the 1990s also triggered terrifi c socio-economic shifts and the introduction of modern forms of doing business, but this process was not focused, nor was it planned. The revolution of the 1990s is an example of a spontane-ous, uncontrollable transformation of the community, whereas modernizing is only possible under a stable political regime that allows for strategic planning. However, political stability per se as a pre-requisite for modernizing is not enough. This is because the groups responsible for leading modernization may wirth-draw from the process at any time, thus making the initiative a failure.

We will take the liberty of singling out four success factors for modernization:Existence of an agent driving modernization.1. As the history of successful and failed modernization suggests, the agent is normally a close-knit elite with great authority.Adequate assessment of contemporary economic trends worldwide, including the nation’s eco-2. nomic capacities. With modernization being, in essence, a method of waging economic wars by leading countries, the most obvious task faced by leading societies is to become a country capable of waging global economic struggle at this time. In almost all cases this objective becomes the fi rst driver for modernization because top societies can only compare themselves with other leading countries. This factor, however, may at the same time become both a potent incentive and a reason for failed

34


An enterpreneurial nationTatiana GurovaEditor-in-Chief, Expert Media Holding

modernization. In an attempt at looking well in the eyes of the outside world, leading nations can, in a sense, divide their country into the metropolitan part and colonies, where the resources of colonies will be applied towards setting up state-of-the-art attractive metropolitan areas. Of course, the success of such a modernization is bound to be transient and very weak. Another danger in this way of relating with the outside world is seeing the internal capacities of one’s nation and the project implementation as a ‘catching up’ modernization. As economic history suggests, ‘catching up’ modernization has never off ered long-term and stable advantages to any country in a global economy. The plan and idea of modernization should conform to economic and technological forces and 3. trends that take shape in the country naturally. Modernization should develop them and promise and off er advantages to advanced, though not necessarily broad, social strata. As experience sug-gests, organic modernizing that relies on the nation is usually successful, whereas the success of au-thoritarian modernization is transient.Modernization should be implemented in a strong political or ideological setting that is capable of 4. formulating the primary task of the nation. This is important because the objective of securing cer-tain economic advantages for the entire nation and for individual social groups is not an adequately powerful incentive.

To all appearances, we have presented a view of modernization, which focuses on a person who seeks to be both a participant in and a benefi ciary of modernization. We do not mean a person in general but rather a personality included in the unit called the ‘nation’. Western nations themselves have been treat-ing modernization more mechanistically during this period of globalization. Such a modernizing concept focusing on the human being and the nation is more comprehensible to Russia, which is a Western country that skipped the stage of becoming a modern society in political terms. Being guided by these four features, we can off er a perspective on modernization initiatives that took place in history. Certainly, one can immediately say that earlier modernization eff orts taken in the Western world seem to be objects to be imitated by us because modernizing in Asian nations has not seemed suc-cessful enough. The absolute success leader is the US modernization project. In their project, they man-aged to implement the concept of a society that is free from a hereditary top society, where everybody can be successful. This irrational concept that started with the words: “We are standing on a hill, and everybody is looking at us…” has enabled the USA to remain the country of innovative spirit for a very long period of time and achieve an extremely high level of well-being, while retaining extremely high nationalism that seems to be archaic in this era of globalization. If we compare the US modernizing project with the British one, we can see that the modernizing concept with involvement of the the widest possible strata of the nation is the strongest. England, which initiated its modernizing project in the 17th century has never man-aged to overcome its elitism and, as many Englishmen believe, represents the sum of two entities: metro-politan London and the rest of the country. Post-war modernization projects of virtually all Western European countries seem successful to us be-cause they have, undoubtedly, enabled the countries to become appropriate economically for the global economy where the powerful US economy dominates. With the high democracy and nationalism of the continental Europe, European projects have always relied on internal resources and proceeded from na-tional interests only. According to the brilliant study, Global Competition, undertaken by Michael Porter, an American economist, such a combination of values applied during stable economic operations enabled all Western European nations to successfully fi nd their place in the international division of labor. We would like to separately note three non-European projects: India, Japan and the USSR.India can be regarded as an example of excessively localized modernizination. Overall, India tried to imple-ment what was really a Western modernization project. But the idea (sometimes considered as an example

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AN ENTERPRENEURIAL NATION

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worthy of imitation for Russia) of creating model modern industries rapidly integrated into the current glo-bal economy (we mean the bets placed on IT), which should have somehow saved the entire India, has not proved to be quite effi cient. Without a broad base of generally modern while not very advanced- manufac-turing forces, such a densely populated country was unable either to carry out modernizing or to ensure noticeable improvement in the well-being of the people. Japan embarked on modernizing twice, in the 19th and the 20th centuries. It also tried to follow the Western scenario. There, however, the modernizing project in the essence, remained an elitist one. Neither in the 19th, nor in the 20th century did Japanese national culture permit its elites to look to align its aspirations with those of the people, to seek legitimacy forits policy by relying on the more or less broad strata of people called the middle class today. A similar history of Japanese modernizing of the 19th century shows how such elitist project is fi zzling due to a series of concessions and compromises on the part of the mod-ernizing part of the top society to its conservative portion. As is known, these developments ended with excessive militarization of Japan. The post-war project, seemingly more successful, did not result in estab-lishment of an economic and political system capable of evolution of in its own. The 20-year recession of the Japanese economy, in our opinion, is proof of this.Modern Russian political culture does not let us call the USSR modernization project a success, but it was one. Soviet modernization, which began in the late 1920s, enabled the creation of a modern state with a strong economy during an all too short period of time based on revolutionary social transformation and in a uniquely hostile environment. Even though the USSR perceived itself as an empire, it implemented the principle of the ‘metropolitan state for colony,’ rather than the ‘colony for the metropolitan state.’ It is totally unclear from today’s experience why this project exhausted itself so quickly, immediately after it peaked in the middle of the 1960s. Why, having reached its highest-ever technological level was the country unable to continue its modernization initiative even though the technocratic portion of the society had its rep-resentatives in power? However, we can note another important thing: without a political idea where the policy is treated as the most accessible benefi t out of all of those currently possible, and without the idea of global competition among political systems (“life in this country is better, most just, more successful and merrier”) that touches a signifi cant portion of individuals, a modernization project does not have any chances for long-term success. In this context, the appropriate question would be: What is the political concept of Russian modernization that meets the principle of common benefi t and the preservation of key historical values, such as maintain-ing the territory, remaining a multi-ethnic state, and the defensibility of its borders? The question to which a majority of Russians want to answer affi rmatively seems to sound as follows: is it possible to implement the concept of democracy and a European national state within our imperial-size space? Actually, just as the ambitious Americans are, we are standing on the hill, and the entire world is looking at us: Can this huge, cold, semi-Asian country become a strong and free one? Our entire history shows it is impossible. And it is the challenge of modernization.Perhaps, determining the social basis of such a modernization, rather than the economic status and the abilities of the elite, is the critical issue for modernizing now. Who will be the key benefi ciary, who will gain access to power later? Westernizers have historically had great weight in the fi eld of humanitarian and, consequently, political issues in Russia. There can be no doubt that Western civilization is a powerful historical event, which is based on a set of important values and has achieved unbelievable heights in very many fi elds of hu-man activities. But ‘believing’ is insuffi cient for a Russian Westernizer. Our Westernizers deny the mere possibility of existence of Russia. Any mentioning of national – interest or opportunities – is perceived by them either as an intolerable archaic idea or as a form of aggression. Trying to rely on Westernizers in


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a modernizing project means to implement it as part of the ‘metropolitan area – colony’ concept. It will become clear very soon that the center of the metropolitan area has moved from Moscow to London and from Brussels to Berlin. With innovations being regarded the most important dimension of modernization now, a logical idea aris-es: to make highly qualifi ed technocrats the social foundation for modernization. However, this stratum is prohibitively small. Whereas just 12–15% of population in Western economies are engaged in business, not more than 1% of the peole is capable of working in innovation. Betting on them means to follow the way of dividing the country into ‘metropolitan area’ and ‘colonies’.Thanks to the mild democratic revolution of the 1990s, a sizable chunk of the population look with great interest at the national focus of modernization took shape in the 1990s in Russia. First of all, thanks to its work during the last twenty years, Russia was able to widely implement key elements of the market economy, prevent industry from destruction, and set up new enterprises. These people cannot in any way be accused of being behind the times: they use the Internet, travel abroad, in particular, in search for solu-tions for their business; they introduce innovations more often than major companies, including those ac-cumulated in the Soviet defense industry. This category of nationals in Russia are developing cutting-edge educational technologies and private medicine; it tries to be engaged in developing the cities, upgrading agriculture, and more. They are closely connected with their community, either due to homeownership, because they understand that nobody needs them elsewhere, or because of an irrational love for their motherland. This stratum is keen on strategic development of a national economy so that their business be better protected and more effi cient. They can be called ‘new nativists’. In our opinion, they are an organic foundation for modernization. If we agree that the primary task of our modernization project is to implement the concept of democracy and the European national state within our imperial-size space, then we can look to the many works of Western theorists in order to determine the purely economic objectives for modernization. The latter af-fi rms that building up a democratic country is impossible without the adequate development of manufac-turing. Adequacy in the modern world envisages three things: • establishment of a strong productive national system, the effi ciency of which is higher than that of global

average; • balanced allocation of manufacturing forces in the country;• existence of an innovation system.Our fulfi llment of these three items would enable implementation of nationally-focused modernization.

Economic Trends in the World: is there certainty?The modernizing objective envisages apriori that the country seeks to be up to modern requirements. But what is meant by being modern now? What are the key developmental trends of the world economy into which we should fi t well?At fi rst glance, everything might seem easy: it is the economics of information technologies and innova-tions. However, development of these two sectors will not be enough to create conditions for industrial growth in such a country as Russia. It was insuffi cient even to the USA for which information technolo-gies triggered growth in the 1980s. The information revolution was supplemented by a large-scale glo-balization process and the establishment of a new system of global fi nancial turnover. In order to fi t into the modern economy, we need to try to understand which critical social shifts will manage the global economy in the next decades. As we think today, information technologies, resource-saving technologies, healthcare and life-extension technologies — all of them are parts of one and the same global process formed by the previous decades.


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We should qualify this as we regard economic development as a part of a long-term concept. In fact, we are not the only ones to share this approach: in particular, Carlota Perez, a professor from Cambridge and perhaps the world’s greatest expert on long economic cycles and, at the same time, an advisor of the Bra-zilian Government, also uses this concept. She emphasizes that the world economy is evolving on a cyclic basis, and the length of these cycles is some 30 years. According to the Perez ‘s logic, two 30-year cycles make up one 60-year cycle – it is a long wave. This wave is formed around one core technology that, hav-ing emerged in the fi rst 30-year period, causes signifi cant changes in the prevailing socio-economic sys-tem of the world. In our opinion, such an approach is extremely fruitful now because it lets us understand what social and economic changes we should expect in the next 30 years. The ‘long wave’, within which we live, began in the 1980s and was preceded by an unpleasant crisis decade of the 1970s, when, just as nowadays, the new dimensions of the development of the global economy were discussed. The authorities and environmentalists brought us the idea that power-saving and ‘green’ technologies will be the key to overcoming those crises. Actually, the volume of investments into this fi eld increased to some extent in the 1970s. Nobody could predict, however, what, in particular, would actually change the world in the next decade. The US economic recovery started in 1981, and it became clear in 1985 that the investments into industrial computerization are the main driver. At the same time, the processes of transfer of global company pro-duction facilities to developing nations evolved. This, naturally, also changes the picture of the world dras-tically. Early in the 1990s, economist Manuel Castells coined the term ‘information economy’, i.e. a econo-my, the key agent of which is the network player. It became noticeable later that, unlike previous periods of economic development, many more economic actors invent, manufacture and introduce technical innova-tions on the market. The information global economy became an innovation-based one (even though one should make qualify this with respect to this term: these numerous innovations have not changed human lives drastically, the mere fact that many people were able to produce innovations was a major change).The eff ective period of this triad – information system development, globalization and innovations – ended with the 2008 slowdown. Some economists suppose we are in for entirely new innovations, like the innovation of personal computers (and of course, the invention of iPad cannot be compared with a PC by its innovative nature), whereas others think that, in the next 30 years, the global economy will be rebuilt and will master the options provided by information technologies more deeply and broadly. For example, invention of conveyor belt production in the 1920s resulted in greater production effi ciency, which, in turn, enabled the setting up of a society oriented to general welfare in the 1950s. If we take the second ap-proach, we should determine, what changes in the global economy the information era has led. In our view, bringing a large group of countries with low initial living standards, a lack of traditions of democratic political culture, a shortage of many vital resources and a large population, into the capital-ist zone, or the Western economic model, was the most fundamental change that occurred from 1980 to 2010. Globalization, which was for the sake of using cheap labor from these countries and upgrading living standards in the West, resulted in an initial modernization of these countries themselves and laid the foundation for shaping in them of the political will to establishing their own, rather powerful, pro-ductive systems. Let’s note that, even though the Muslim world was not engaged in that process to the same extent as Asian and Latin American countries were, they, represented by Iran, are desirous of eco-nomic mobilization now. The drastic nature of geo-economic changes was not evident before China grew in strength. First, China changed the profi le of world commerce by becoming the biggest manufacturer and exporter of consumer goods and thus pusihing on the real economy of the West, mainly Europe. Second, China developed a clear understanding of limited natural resources of the Earth. It became clear that, if the country with such a


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large population aspires to the living standards of the Western world, modern technologies will result in a shortage of resources. Third, Chinese economic growth has naturally started to transform into its military growth, and the Western nations have begun to feel the new level and nature of the military threat. Finally, China has demonstrated that the Western economies has (during the years of its development and, in particular, by developing information technologies and the innovations sector) created conditions for any country to be able, within a very short period of time, to come closer to the technological level of the West-ern countries. The notorious closed nature technological in many spheres of business operations proved to be an illusion. The global average effi ciency of production processes proved achievable, broadly speaking, in one generation. As a result, we have four shifts:• the appearance of new global factories, the prosperity of which leads to de-industrialization of the West;• an obvious demand for resource-saving technologies; • the emergence of new factors for military confl icts; • real transparency; the accessibility of the technological foundation of the contemporary economy. We do not take into account all technologies; there are protected technologies but, to all appearances, the emergence of innovative operations in recent decades has resulted in the disappearance of technological monopolies in the creation of production facilities with normal effi ciency.If we consider this new situation from the Western point of view, the choice of the West is as follows: either to get ready for a series of new confl icts for resources or to generate a new market environment that mo-tivates developing nations and help them create modern productive forces everywhere where there is a social order for that. In particular, it should result in: • increased economic nationalism of developing economies and their switching to the domestic market; • the end of the de-industrialization of the West; • the development of a global technologies market; In this context, Russia will fi nd itself in the center of rearrangement of the global economy if it implements the modernizing program.

Victor Polterovich on the Goals of the New Millennium:“Socio-economic development theory – in particular the portion that I call the theory of reforms – is the most important research dimension in the contemporary economy. I am sure that the current tension in the world originates, fi rst and foremost, from economic distinctions. Therefore, the most essential objective of economics is to create a theoretic basis that any country lagging-behind could use as a successful theory for catching-up development. This is so that the nation believed in the possibility, during the course of one or two, or at most three generations, of bridging the gap separating it from the ‘golden billion’. Over the recent century, we have accumulated an extensive experience of reforming the most diverse economic systems. We have seen not only a few lucky solutions but also erroneous, failed attempts. Reformers in diff erent countries repeat one and the same errors at diff erent times: they regard reforms as an absolute benefi t, without trying to see related costs. they take it for granted that the most cutting-edge institutions and technologies should be borrowed. They impose abstract forced arrangements to businesses, instead of making them allies. They do not try to make up for losses to population strata that lose. They do not seek to sequence the reforms correctly.”

Source: “Modernizing is a Creative Process”, an interview with Victor Polterovich, RAS Academician. Expert, issue No. 26, 2010.


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Euro-Russian Integration The USA, China and, on the outside, BRIC countries, act as the main players in discussions of future direc-tions for world economic development. One player, Europe, is rarely mentioned- which is unfair. Its intent to counteract the US fi nancial monopoly and to introduce a single European currency was not appreciated. For Americans, Europe is a reliable partner that, for some reason, tries to play its own game. For Chinese, it is area to expand to. Globalization, with its heyday of fi nancial capitalism and the appearance of new cheap global factories, proved a hard test for continental Europe, the economy of which is based on qual-ity and rather expensive production. During the fi rst decade of the new age, Europe experienced a true de-industrialization. However, the crisis hampered this process and, due to spontaneous crisis reconstruction of the global economy, Europe has the chance to develop its industry. There is a great historic logic in it. During several centuries of its development, Europe has accumulated extensive industrial potential, which virtually covers its entire territory. Any European country has at least several unique sub-industries. The engineering and trade skills of Europeans are still unparalleled. Europe is crammed with strong industrial companies. It is enough to say that there are two large global car-makers in France- which is relatively small- and there are four such companies in Germany. This industrial poten-tial will seek to be realized outside Europe after the slowdown. Despite the economic growth that started in the European area, European consumers are too well-to-do to enable growth of European companies. China is able to support itself; China will procure America; Latin America is too far away. The only relatively long-term growth source for Europe is Russia. Representatives of European companies speak openly about that. The technological integration between Russia and Europe could have become an important element of the new growth wave because a major Russian market plus well-educated and rather well-to-do population could enable creating a enclave of preservation and development of the Western industrial culture. Such an integration is clearly underway, and it has obviously become more active after the collapse. However, how adequate is it for a deep globali-zation of Russia?In the essence, there are three types of our technological relations with Europe.The fi rst one, which is the most obvious and large-scale, is implemented in the fi elds associated to some extent with governmental projects. Here we open the door to Europe widely, if only to a very narrow range of major European nations. The most striking example from this fi eld is Siemens’s act in the Russian market (see Siemens in the Russian Market). In this case, the simple integration patterns are implemented most often – either purchase of products that can be processed or joint ventures where the majority stake passes, either immediately or over time, to a European company. It is noteworthy that, in these cases the

President of Banca Intesa Giovanni Bazoli and Overcoming Inequality:“How hard can a person try to overcome inequality among people and nations?Clearly, he or she can only infl uence socio-economic factors… in the face of the objectives outlined in the books of the Bible, a politician should avoid two extremes: on the one hand, he or she should not embark upon the path of integration in achieving these goals, and on the other hand, to regard them as utopian and so abandon their implementation. A Christian should seek to achieve the goals in line with the New Testament but he/she knows that one does not possess the absolute truth as regards the methods of their implementation. The necessary humility, making reasonable decisions, and the constant search for dialogue are derived from understanding one’s own limitations.”

Source: Giovanni Bazoli: Justice and Equality, 2007


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Western companies' involvement in any particular project is not always preceded by an analysis of Russian technological or innovation options. The second way of our technological integration is implemented by private or regional constituents – Russian companies of a town or a province, feeling the deficiency of competencies are looking for Western partners and either create joint ventures or engage them as contractors. Whereas, in the first years of the market it concerned joint ventures, it now concerns any particular form of contract work. The third option is the sales of established businesses to Europeans. This phenomenon is as common among medium businesses as the search for Western partners. The reason for this, as a rule, is the insuffi cient fi nancial capacities of Russian companies. We would like to separately draw your attention to the fact that more and more frequently in these cases we provide not only a great market but also new technological solutions. For instance, this July, Askona Company, which controls a third of the Russian market for mattresses and holds unique patents for spring boxes, sold its 51% stake to Hilding Anders, Swedish biggest mattress manufacturer. As a result, Swedes received one of the biggest and high-tech spring box plants in Europe, while becoming the leader in the Russian market. Of course, loss of leadership in production of mattresses is not a national problem but only if you are Europe. It is Europe

The Expansion of Siemens in the Russian MarketSiemens came to Russia as early as in the middle of the 19th century by building telegraphic lines along railways laid down in that period. The concern was especially prosperous in Russia from 1910 to 1930. Then it helped the USSR with the most advanced developments in the power industry (it supplied turbines, generators, etc.) and in the design of complex construction (subways, the Dnepr hydro-electric plant). Then, for forty years, until the start of the 1970s, Siemens operations in Russia ceased. But in the 1970s, Soviet metallurgical giant plants needed automation of production processes and new technological equipment badly, and Siemens came to Russia again. In post-Soviet Russia, Siemens gradually expanded its presence in its key markets – those of power equipment, control and automatation systems, and railway engineering.The business of the transnational company Siemens AG is divided into three dimensions: industry, power and healthcare. The fi rst two lines of business are actively developed in this country. Industry means comprehensive services to enterprises – supply of diff erent probes, lamps, chips, drivers, trains, and more. It is worth mentioning Siemens’ contracts with Russian Railways for the supply of Sapsan high-speed trains (8 trains at a cost of EUR 600 million each). In addition, the company has tried to begin close collaboration with TransMashHolding many times. It has not managed to do so yet, so Siemens joined an off -the-shelf project – Urals railway engineering plant of Sinara Group. The second dimension of the company’s expansion is power. Siemens has been very productive here since the early 1990s. The Power Machinery and Osram lamp plant are one of the main assets of the company in Russia. However, starting in 2010, the company began intensive expansion to the Russian market, which is evidenced even by a simple narrative. In July, after the launch of the high-speed Sapsan train from Moscow to Nizhny Novgorod, representatives of Siemens and Russian Railways signed a series of documents aimed at deeper cooperation in upgrading the rolling stock of Russian railways. Siemens will create in Russia a joint-venture in the wind power industry.In July, Siemens signed a memo on cooperation in manufacturing and sales of industrial products in renewable energy with Russian Technologies and Rushydro. Siemens will become a holder of the ▲


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that is crammed with industries. Russia is its antipode. So we should take care of virtually every national manufacturer because it develops the culture of its own technological production facilities in our country. Therefore, we have three options – an easy and large-scale upgrading of modern technologies, a lengthy path of absorbing Western culture and developing up our own culture; the and sales of quality assets. Clearly, there is substantial competition between the fi rst and the second way. However, the experience of the global economy shows two things. First, there are no companies built on foreign, borrowed technologies which are leaders in their segment, in the world. It seems the country’s leadership envisages the ability to create and integrate absolutely new things, and it is impossible to import the tools for establishing a company that can lead. That’s why the USSR was unable to create companies that would be in the forefront of economic development for a long time. Second, the experience of European industrialization, which was thoroughly studied by Michael Porter, suggests that in-depth modernizination of the economy of any particular country cannot do without establishment of national high-tech clusters in its industry which fi rst focus on the domestic market. Porter off ers numerous examples to prove that the existence of a domestic consumer enables national companies to refi ne their technologies and products in comfortable conditions, and this platform ena-bles them to win the external market later. Even now we often hear about the opposite strategy: our high-tech companies need an external market because it is of large scale and is occupied by global players. Therefore, allegedly, we should enable our technological companies to become an appendix to Western companies for some time. Possibly, such logic proceeds from the ass umption that by joining

majority stake of the Wind Power Joint Venture, which will be engaged in creating capacities for production of wind turbine components in Russia for the Russian market and will also be responsible for sales and maintenance of Siemens wind turbines in Russia and the CIS. In May, a joint venture of Sinara Group and Siemens concluded a contract to supply 221 freight electric locomotives for Russian Railways. In May, Siemens advised that a joint venture for the manufacturing of compressor equipment that is unparalleled in Russia was established in Perm with the Perm-based Iskra-Avigas company. Gazprom is the end consumer of these products. In the same month, Siemens’ Department for Driver Technologies signed a contract with Gidromashservice CJSC to supply electric engines and transformers for pump assemblies of long-distance oil pumping stations as part of the fi rst stage of constructing the Eastern Siberia – Pacifi c Ocean (ESPO-1) oil pipeline construction. The fi nal customer is Transneft. In April, Siemens and the Voronezh Oblast Government signed a supplementary agreement to the cooperation agreement for the implementation of an investment project for the construction of a power transformer plant. At the same time, Siemens received an order to supply the principal components for the CCGT (combined cycle gas turbine) unit of the South Urals State District Power Plant-2 making part of OGK-3.In March, Siemens purchased high-voltage devices from Siemens. By that time, the concern owned a 51% stake in the joint venture with the headquarters in Ufa. The Federal Anti-Trust Service of Russia approved the transfer of title. After that purchase, Siemens intends to expand production of switches and disconnectors for high-voltage distribution devices used in the Russian market.

Based on materials from information agencies and the company website

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the external market, our companies will gradually become bigger. Historical experience, however, does not give us such examples and at the same time, off ers numerous examples of leadership of companies that grew on the domestic soil. That is to say, we represent an enormous market for Europe, while we cannot occupy the market ourselves. It is not quite logical. The more so, that even modern Russia has examples of successful modernization of an industry based on developed domestic demand. For instance, by 2010, metallurgy could fully resolve the problem of manufacturing premium quality pipes having substituted imports and having occupied its own huge market. It is worth noting that if we don’t elaborate a program for high-tech industry development at the expense of the domestic market in any economic areas, then, in ten years, we will most likely have economy with a very peculiar structure: large commodity companies will prove to be technologically developed. Even now these companies have adequate fi nancial resources to displace foreigners from the market. Other compa-nies, even those that fi nd and implement new domestic developments, will be absorbed by foreigners, be-cause they are fi nancially weak, and the state does not off er any assistance and protection to them. Russia would be better off taking advantage of its great need in modernizing whole parts of our socio-economic system to setup its own technologically strong enterprises and industries. We should say fi rst that the au-thorities have started taking steps in this direction. Second, private companies, fi rst of all as a constituency, is grateful for these actions.A typical example of such a kind of modernization is in Russian healthcare. It is clear that this area will de-velop, that much money will be invested there, because the state is implementing a socially focused policy. On the other hand, the population is willing to pay for medical services, which we see with the fl owering of private medicine in big cities. There is reliable demand for these services there. Connecting public and pri-vate demand gives an enormous market to us. Western companies fi ght for it. The most illustrious example is the Dutch multinational Philips. First, however, there are our well-established players in this market, and, second, Russia has made unique developments in medical equipment, which may serve as the basis for creating a class of modern medical equipment. If such companies and technologies receive preferences for participation in upgrading of Russian medicine, they will have a chance to turn into global leaders in their segments in a decade or two.

New City Construction in PermModern city construction is one of the main triggers that may launch a large-scale innovation process in Russia. This subject is exciting both to individuals and to offi cials, businessmen and professionals. The process of creating a master plan of the city was initiated by Oleg Chirkunov, Governor, and Sergey Gordeev, Senator. The idea is to transform, rebuild the industrial city with a chaotic layout into a city with modern European planning and technologies. To implement the project, a program to study global ‘champion cities’ that implemented the most noticeable urban projects in recent years was launched. Later on, a tender was held among Western planners for the development of a master plan. The tender was won by the Dutch KSAR Bureau that developed some 300 city planning projects in Europe and Asia. Placing a stake on Western designers irritated local architects, and in the future they will be engaged in joint work over the city plan. We would like to note that the implementation of such a project, if it takes place, will bring numerous modern city construction technologies to the Perm market due to its innovative ideas. One cannot rule out that, if Perm issues federally-guaranteed bonds for this project, they will be in demand.

As reported in Expert Magazine


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Therefore, on the one hand, the scale, and, on the other hand, the clarity of the objectives for modernizing the Russian economy lead to the need for a strategic plan for this modernizing. Businessmen speak about that more often, naturally, emphasizing that it does not concern the system of rigid planning of the Soviet era but the need to determine the strategic priorities of the state, in particular, supported by governmental guarantees and budget costs. Since today there are diff erent ways that various market players can contact the authorities, today we have the situation that Western players or the biggest Russian companies are better aware of these strategic plans, whereas medium businesses do not have access to such information. However, as we believe, there will be a need for greater openness of such plans followed by obvious preferences for Russian businesses. Once again, we emphasize an important, in our opinion, thing: medium businesses today can turn into a network tool, using R&D developments from the late Soviet and introducing them into the Russian econo-my. And we have a chance, based on such a symbiosis to create a whole range of competitive industries. If we don’t have developments of our own, let our businesses better engage European contractors and cre-ate joint ventures rather than opening our market to European companies thoughtlessly.

What Russian Economy Can and Cannot DoAccording to Michael Porter, at a time of national modernization everybody – citizens, businesses and the state – become investors in their economy. The word ‘everybody’ is very important here. At a certain stage, economic development becomes a common objective of the nation. However, for this purpose, people should be confi dent that the national economy will acheive such an objective. In this context, our exces-sive desire to rely on external forces in our modernizing is due to the fact that, even in their economic ac-tivities, a part of our community strongly believes that our economy is ineffi cient, develops due to export and the commodity industry only. It does not have any institutes that promote development. No doubt, if we measure our economy statically, we will see that its effi ciency as the sum total of direct productivity ratios of all companies is insignifi cant. However, if we measure it dynamically, from the point

Philips’s Strategy in the Russian MarketOne of the fi rst global orders received by the company was from Russia. Anton Phillips, a founder of the company, received an order for 50,000 lamps for illumination of the Winter Palace in St. Petersburg in 1898. This order accounted for 50% of total Philips annual sales and was so enormous that the company’s plant could not manufacture that many lamps at that time. It was that contract with Russia that made top managers of Philips to think about export.At present, Philips operates in two segments in Russia – healthcare and light solutions. In May 2010, Philips and Electron NIPK (research and development manufacturing company) announced the establishment of a ‘full-cycle innovation partnership’ in the development and production of high-tech medical equipment. The company was the fi rst global manufacturer with full cycle R&D in Russia. The plan is that, within three years, up to 51% of R&D will be carried out in Russia. This concerns not only devices but also high-tech components.Besides, the company is involved in the implementation of governmental healthcare programs, by making available its developments and experience in the medical equipment segment. At present, 18% of healthcare institutions of Russia are set up with Philips equipment. The most recent achievements include installation of a state-of-the-art computer imaging device in Voronezh. In seven seconds, it is able to scan a patient’s organs.

Source: reports from news agencies


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of view of return on investments, meaning the ability to transform and grow, we will have to admit that our economy has an inherent powerful development mechanism. To begin with, during the collapse of the USSR, the Russian economy lost 45% of its industrial production. These were the world’s biggest losses ever in peacetime. To compare, in the Great Depression the United States lost a third of its production facilities. Despite reduction in the living standards across the country in the fi rst half of the 1990s, this reduction was not as signifi cant as during the Great Depression. Western economists were unable to understand at that time why, given such scope of destruction, the country avoided the same economic calamities. The answer is that all economic constituents of Russia – nationals, new fi rms, state-owned enterprises – were ready to self-organization and exhibit a certain economic solidarity. It is enough to remember how quickly and to what extent barter came into being and saved our economy during the fi rst 6 months after price liberalization.

Unique Russian TechnologyRussia has a unique X-ray technology that enables creating X-ray devices with resolution that is 100 times as high as the resolution of modern imaging devices. The author of the invention is Muradin Kumakhov, Ph.D., who in the early 1980s suggested that in order to turn an X-ray to several grades it should be launched at a certain angle into a narrow channel. The ray will be reflected many times from the internal walls of the channel and will exit in another direction. This example makes it possible to focus X-ray irradiation. For this purpose, it should be driven into a bundle made up of several thousand differently curved channels, each of which will turn the rays to its angle. As a result, at the exit, we have a focus spot of several microns in size. Such a complex multi-channel system was calculated and drawn on paper by Kumakhov in 1984. Scientists did not believe him: classical physics insisted that X-rays cannot be managed by definition because their refraction coefficient is close to 1. In other words, when passing through different media, X-rays do not virtually deviate from their initial direction. One should have created a device that would display a regular ‘theoretical effect’ by Kumakhov. This device was created in the Kumakhov’s laboratory and called the Kumakhov’s lense. Using it, one could ‘see’ an internal structure of virtually any object. The resolution of the observed ‘picture’ will be approximately 100 times greater than the one of any modern X-ray imager. Specialists believe that the possibility of managing X-rays may give a strong impetus to the development of 25 to 30 fields of science and technology, first of all, medicine, biotechnologies, analytical toolmaking, micro-electronics and geology. Thus, to a biotechologist, the Kumakhov lens gives an entirely new quality of structural analysis of proteins and other substances; in medicine, it will be possible create new generations of X-ray diagnostic equipment. In particular this equipment will allow for the detection of cancer neoplasms at very early stages of development. And it will be able to do at a rate of 20 times lower than current levels of radiation exposure.However, in the quarter-century that has passed from the date when Muradin Kumakhov assembled his first X-ray control unit, the only economic constituent capable of continuing the breakthrough development was medium high-tech business. The market history of success for the Kumakhov’s technology is ensured by NT-MDT, Russia’s leading manufacturer of scanning microscope probe.

According to Expert magazine.


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We would like to specially note that during the same period of time the initial market institutions – manu-facturing companies, trade networks of varying level of civility, banks, investment companies, wholesale import purchasers, and, fi nally, major commodity companies that ensured a positive balance of payments to Russia – began to appear quickly and on a large scale. In essence, within fi ve years- by 1995- we had created most of the framework for a new economy based on market principles. To all appearances, despite the fact that breakage of habitual economic connections was a major blow to the socio-economic system, the key diff erence of our recession in the 1990s from the Great Depression was that the ‘window of open-ings opened here’, and their window of openings closed. The clarity of the impending changes encour-aged enormous economic entrepreneurial energy of diff erent economic actors. The economic recession bottomed in 1995 and, starting from 1997, Russian economy began growing in the straight line broken by two easily explainable crises – in 1998 and in 2008. They can be explained by internal logic of the process and external crises. Within this period, the Russian economy changed constantly. We would note two most substantial aspects. The fi rst one consists in the constant territorial expansion of the ‘capitalism area.’ Importantly, despite capital concentration during the fi rst stage, in the hands of a few fi nancial and industrial commodity groups, no territorial localization took place. It is at the fi rst stage of the market economy only, before 1998, that development was territorially localized in Moscow and St. Petersburg. After ruble deprecia-tion became a natural protection for the domestic market, a rapid capitalist expansion to cities of one million or more in population began. These cities were invaded and transformed in a few years. By the end of the cycle that ended in the 2008 crisis, the biggest cities of Russia matched Moscow in living standards. Such a built-in trend towards territorial development suggests that Russia is ready for the implementation of one of the most important principles of quality modernization — the harmonious distribution of the productive forces in the territory of this country. After the 2008 crisis, expansion of the ‘capitalism area’ continued to the periphery of Russia – the area of business interest was not the mid-dle class in cities of one million in population or more but the middle class in towns with a smaller popu-lation. This is evidenced in particular by the extremely rapid development of trade networks that focus on the provincial middle class. Another particularity of post-recession development is the accelerated recovery in the south of Russia – southern Siberia and the southern part of the European Russia – as compared with industrialized central Russia.The second aspect consists in structural changes of the economy during this period. Many believe that our economy’s structure has not changed during this period of time, with a great share of the economy being in the commodities sector. It is common to speak of the rent nature of our economy where the commodity sector lives on rent, without re-allocating the added value for the benefi t of the remaining industries. How-

Nikolay Dobrinov – on the opportunity for planning“If we compare the structure of Russian economy, the structure and scope of the consumer market in Russia with similar parameters for averagely developed nations, one can easily calculate how many new production capacities should be created to bring the structure of our economy in line with global trends. For instance, if we actually want to build one square meter of residential space per person a year versus 0.35 sq.m. today, it is clear that cement production should double at least. If we want 50% percent of drugs in our pharmacies to originate from Russia, establishming new facilities in the pharmaceutical industry will be required. And this applies to many other industries”.

Source: Plant and Freedom, interview with Nikolay Dobrinov, Vice President, IST Group , Expert, issue No. 47, 2009.


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ever, calculations show that this is not so. If we create indices of structural changes for the entire range of industries provided by the Russian Statistics Committee, we will see the real picture.The trends in aggregated indices are as follows: the mineral production index (commodity sector), process-ing industry index and electricity, gas and water generation and distribution index point to the fact that starting from 1998 and during the entire decade, the commodity indices dropped, and the processing industries’ index rose (see Chart 1 and 2). That is to say, we witness a steady commitment of the economy to a structural shift towards the processing industry. This, fi rst, makes us doubt the truth of the thesis of the rent nature of the commodity economy because the rent holder proves to be constantly re-allocating its added value to another economic sector. Second, it points to the fact that the mechanism that makes economy diversify for the benefi t of the processing sector is built into any economy. This mechanism is domestic demand. All these years, Russian economy developed according to the absolute standard for any country rather than under any exclusive scenario for a commodity economy. There is a stage in the devel-opment of any economy when it exploits its inherent competitive advantages. At this stage, the initial capi-tal and liquidity are accumulated and further invested into development. Due to this natural redistribution of capital and liquidity from industries operating in the external market to industries operating in the do-mestic market, a new economic structure that largely focuses on sustainable domestic demand is able to further develop as the added value generated in the domestic market takes shape gradually.According to Porter, all national economies pass this fi rst stage. This is understandable if we look at com-mon considerations. For instance, the English industrial revolution was possible by exploiting the competi-tive advantage of the island country: access to cheap sea routes. Later on, the money earned on trading and development of other nations’ territories were invested in the domestic market and pushed the devel-opment of the British industry. The question is: how does this diff er from our commodity export income and why we cannot move to our own industrial revolution.Being sure of our abilities allows us to make further, more detailed analysis of structural shifts. In the dec-ade from 1998 to 2008, we saw explosive development of the industries servicing domestic demand. The most obvious example here is the food industry. However, approximately from 1998, the range has greatly expanded. The most illustrious examples are: growth of the auto production sector (the index increased 2.5 times in ten years), the increased production of resins and plastics (the index grew 3 times). From 1998 to 2008, we saw the growth of an aggregated index of machinery and equipment manufacturing (2.8 times). Typically, out of all types of equipment production, the radio communications equipment produc-tion index quadrupled. It is clear that the booming production of radio communications equipment was in response to the rapid development of wireless communications in this country. We can also see more unexpected things. In the context of the middle class desire to have a cottage house, the wooden house production index rose 7 times without being aff ected in its positive dynamics even by the large-scale 2008 crisis. It seems quite simple: there is demand, then there is production. However, the national economy need not do more. It should fi rst effi ciently service the emerging domestic demand. The


Nikolay Dobrinov – The Scope of the Task Resembles Industrialization“I believe that the very essence of Russian economic development is in its pre-industrialization. On the one hand, this process should include greater effi ciency of existing enterprises, their upgrading and technical re-equipment, closure of non-competitive production facilities. In terms of scale and scope of the requisite investments, this objective is similar to the objectives of the 1930s.”

Source: Plant and Freedom, interview with Nikolay Dobrinov, IST Group, Expert, issue No. 47, 2009.

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Changes to the fraction of mining operations in the industrial structure

Changes to the fraction of processing industries in the industrial structure

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Food production index dynamics (January 1995 is taken as 100 %)

Automobile production index dynamics (January 1995 is taken as 100 %)

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Rubber and plastic goods production index (January 1995 is taken as 100 %)

Machinery and equipment production index dynamics (January 1995 is taken as 100 %)

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Radiocommunication equipment production index dynamics (January 1995 is taken as 100 %)

fact that it did so during the previous decade shows that there is no sense looking for development im-pulses in the external market now. The national economy has a huge momentum. Our domestic demand is not primitive. An educated population, urban culture, and a relatively high engineering culture in this country shape the demand that used to be called a qualifi ed demand. Generally speaking, Russia is now the absolute global leader in terms of unsatisfi ed qualifi ed demand (which is understood, for example, by Europe). Porter, in his study of International Competition, emphasized many times that companies that target a qualifi ed domestic consumer accumulate greater unique competencies more quickly by means of constant close contacts with such a consumer. And this cannot be achieved with a foreign consumer be-cause of linguistic and cultural obstacles, which enables them to expand to external markets more quickly. Therefore, exploitation of signifi cant domestic demand may become the key driver for upgrading the Rus-sian economy, in our opinion. As the previous decade shows, the economy is ready for it.A question arises: how to transform this potential demand into a real one? The fi rst answer is obvious: there is a need for public programs – transportation, residential, medical. The federal authorities need not be operators. At present, greater social responsibility and greater initiative are demonstrated by regional authorities, and there is a need for tools that would help make these programs less expensive for the budget (bond market development) and more effi cient (engineering business development). We are afraid of governmental projects, as we are sure that government intervention into economy makes it less effi cient. It is not so. Of course, effi ciency of each particular project with state involvement is lower than in case of its implementation by a private company. But at the expense of the scale of the market that can be created by the state, the integral effi ciency of governmental programs is high. There is no denying that a modern state, by means of huge sums of money, is the most powerful player in a capitalism economy, and the countries insulating the state from economic activities fail in global competition. It is also noteworthy that all developed nations that shifted from a social structure with a comparatively small middle class – some 20–25% of the population (as the case was in the 1920s) – to a social structure with a middle class comprising 60–70% of the population occurred in all cases with the intensive participation of the state in the shaping of domestic demand.

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The second answer is related to the connection between labor and a nation’s prosperity. Western economies were based on very deep, clear principles formed by classical market scientists so long ago. They are perceived as banalities now. Adam Smith stated a simple thing: the nation where more people live is richer. In the modern world, it is not obvious at all because many people can aff ord not to work. Smith proceeded from the assumption that a populous nation can produce a greater added value than a small nation, and the former will make use of it in the market and in a competitive global environment. We believe that the governmental attention to unemployment is behind this in-depth principle. For a well-being of a country, it should create many jobs with high productivity. If they are available, a national economy acquires very new features that automatically improve living standards. Developed internal production facilities support competition that cannot be compared with the one created by import. It leads to reduction in product prices, which, in turn, improve living standards. Today, even though the Russian economy is much weaker and poorer than that of developed economies, the cost of living is much higher here. This results from underdevelopment of a whole range of industries that service domestic demand. The idea voiced by Egor Gaydar that we do not need light industry because we can buy everything abroad proved wrong in terms of the creation of national wealth. It is only by creating production forces that serve a signifi cant portion of domestic demand that we will be able to drastically improve living standards in this country. And without this, we will not be able to develop a modern economy capable of reliably generating innovation because the most qualifi ed labor resources will constantly move abroad. Therefore, modernizing the Russian economy today can, on the one hand, ‘rely on powerful domestic demand, and, on the other, it is essentially impossible without large-scale creation of new productive forces that will enable both to scale up created added value and, at the same time, to automatically improve living standards in this country.

How A Growth Spiral Can Be CreatedThere occurs a hidden dispute between the proponents of modernization based on the large-scale upgrading of the technological foundation of the economy and the proponents of innovation and modernizing by creating a powerful innovations complex in Russia. However, if we follow the contemporary logic of national modernization efforts with their triad – productive forces, territorial distribution and innovation – we should agree that modernizing the technological basis and creation of the innovation system should take place simultaneously. To all appearances, we are able to set up companies that will turn into global leaders in any particular sector in the future in their territory. Several dozen leading companies are required for a fully successful modernization. They distinguish catching up modernizing from modernizing that enables a country to join the ranks of global economic leaders. But a tool be found that can connect technological modernization and innovation?Carlota Perez calls the task a ‘growth spiral.’ She means that the economic segments that are growing simultaneously or have a good growth potential and where topical innovation solutions (preferably domestic, otherwise borrowed) exist should be singled out in the overall modernization plan. As an example, Ms. Perez speaks about our agriculture. “If your agricultural production grows rapidly, and it is so, it would be reasonable to look for innovations suitable for agriculture, because growing industries normally need innovations”. This logic is understandable. A growth spiral allows one to combine existing demand and naturally growing productive forces with innovations that lend extra efficiency to these production forces, either by cutting down production expenses or by changing product quality.

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If we follow this logic, we should consistently single out all economic segments which have natural potential demand growth here, analyze available production potential of these segments, and create conditions for the growth of this production potential. At the same time we should be establishing the cadastre of new technologies available to us or (if not available) capable of bringing our production capacities to the forefront of the appropriate industries. We always emphasize that, to begin with, we should compile a cadastre of our technologies, for one important reason, which is rarely mentioned by or which are our external advisors not aware of. There is a certain temporary logic in the development of innovation. Innovation that updates industrial potential at any particular time always emerge several decades (to be more precise, 30 years) before. This is the natural period of ‘adaptation’ of a scientific breakthrough to practical needs. It means to us that we have a topical innovation reserve accumulated by late Soviet science and defense industry, and it should be used in creating growth spirals. Professor Reinert, proceeding from the experience of catching up modernizing, suggests another simple principle that would enable us to single out areas for growth spirals. He affi rms that one should analyze the trends in production before reforms and the areas where great production losses occurred will be promising. For instance, if a country could manufacture much metal-working equipment, and it does not manufacture it now, then great potential is likely to exist here, because the structure of national resources facilitates the expression of these competencies. To all appearances, such logic works because, as we saw, the Russian economy started to restore the processing industry, which was rather well developed in the Soviet era, during the 1998/2008 cycle. This kind of new potential is hidden in the medical equipment production sector. As analysis of Russian Statistic Commission data suggests, over the years of market economy, we have lost virtually the entire segment. The share of medical equipment manufacturing in total equipment production dropped 14 times and is nearing zero now. However, at the micro-level, we witness the double-digit growth of this segment. In the environment of small innovation enterprises, medical equipment is one of the most common topics because, on the one hand, our engineering thought is rather strong and, on the other hand, such production facilities do not need much investment. We also know of growing demand for private medicine and the readiness of the state to invest in the technological upgrading of healthcare. Thus, modernizing healthcare in terms of the application of new technologies is a perfect example of growth. In general, in selecting growth spirals, it is critical to rely on the features inherent in the economy or the nation – either on natural achievements in production potential or on natural needs – and to strengthen both things with state resources.Besides medicine and agriculture mentioned above (an example of how state preferences for a naturally growing segment create conditions for explosive growth of the sector), two other sectors, which are more powerful and produce greater impact on economy and employment, are obvious – new city construction and creation of transportation services. Active modernization and innovation processes are taking place in these sectors. New city construction is one of the most vital subjects for the Russian middle class. Cities, towns and urban settlements look for options for creating a comfortable space. This search and implementation of individual (even minor) projects entail a whole range of innovation sectors – new power supply, new materials, new designing. Nobody doubts that the potential of this sector in Russia is enormous.The same is true for the development of a transportation infrastructure. Spontaneous processes of introducing new technologies that cover such large-scale sectors the creation and application of new materials take place here. For instance, the other day Sibur launched the production of geosynthetic fi ber, the use of which greatly improves durability and wearing qualities of structures, in particular, highways


54

and railways. In this case, it concerns the introduction of a Western technology. However, it is very likely that we have a whole range of our own technologies in this fi eld. The topicality of the problem of singling out growth spirals and the psychological readiness of private advanced players to develop whole large-scale sectors is emphasized by the fact that the government is more often called to establish technological corridors for residential premises and road construction, which determine the technological parameters of basic structures. Russian secondary education of the new type, which is spontaneously developing in this country, based on our Soviet developments, may also become an unexpected growth spiral. These educational approaches make it possible to instill the project approach in children, starting from adolescence, without prejudice for academic knowledge. Development of this fi eld will not make the state bear virtually any costs and will enable, in ten years already, to make drastic changes in the employment market, in terms of the readiness of people for independent self-starting operations. Another important thing for the emergence of growth spirals is openness and the availability of new technologies, which is supported by a new quality of information openness. This is likely to be important for territories and for resolving the objective of even distribution of production forces in the territory of a country, rather than for industries where decisions are made within corporations. At present, we frequently come across the obvious activism of regional authorities or regional elites willing to actually create their local growth spirals. The most illustrious example from this sphere is the settlement of Maslyanino located 300 km from Novosibirsk. Just in 5 years, it turned from a desolate, dying settlement into a prosperous village sustained by modern livestock breeding with all the requisite modern social infrastructure, including its own alpine ski resort. Foreign investors and public subsidies were used for modernizing the settlement but, in our opinion, the most important factor was openness to advanced technological solutions.Therefore, the principle of growth spirals can be applied both to resolve the objectives of modernizing branches and sectors of the national economy but also for modernizing regions. If we speak about certain instrumental things, then, for determination of growth spiral areas, it would be useful to do several things, in our opinion:1. to single out sectors and industries which already have production growth; 2. to assess the demand potential in these areas and the potential to increase demand by means of public

resources; to assess the nature of this demand – to what extent it meets the social shifts naturally taking shape in this country and in the world;

3. to create a database of rapidly growing companies in these sectors that use innovative developments (preferably domestic);

4. to elaborate a system of preferences for companies using innovation in the appropriate sectors as well as a system of preferences for engineering/ development companies that ensure systemic implementation of new projects in these industries.

…We are faced with the objective of implementing a concept of democracy and European national state within the imperial-size space. This objective cannot be resolved without establishing a powerful, technologically advanced production system. The entire 15-year history of Russian economic development suggests that we have excellent prerequisites for creating such a system in the foreseeable future. The market system that took shape in Russia responds to market openings quickly and, in case of targeted promotion of demand in certain sectors, one can count on super-fast growth of these areas. An additional pecularity of our economy as compared to the economy of ‘ordinary’ developing nations is the availability


55

in Russia of a stockpile of innovations reserve from the Soviet era that now, sometimes spontaneously, is used in the real economy. This enables us to technologically develop not only on borrowed technologies but also on our own developments. We think Russia can build up its modernizing model on the combination of three national factors – domestic demand enhanced with public involvement, a national capital and national innovation system – to a greater extent than other developing nations. It does not mean that we must be insulated or underestimate the value in using accumulated global potential. It only means that our modernization can allow us to aim to create a modern national capital that can be on the forefront of economic and technological development of the global economy in subsequent decades (in certain sectors).


The long-lasting success of a national economy is directly to its level of innovation. Even before World War Two, innovation was described by Joseph Schumpeter as “the essential element of a new type of competition.” All politicians today declare their allegiance to an economy based on innovation. And

that’s understandable: the dynamism of development of the innovative activities in diff erent countries sets apart rich and poor countries (the correlation between the level of innovation of a country’s economy and the welfare of its citizens was recently confi rmed in a comparative study of 115 countries). There are those countries which make surplus profi t on technologies and those which settle with the vicissitudes of their natural advantages: a benevolent climate or natural resources.Until recently Russia was quite satisfi ed with such fortunes. To this day the fuel and energy resources and metals constitute up to 80% of Russian exports. However, the recent world economic crisis has demon-strated that this is quite an unstable source of income.Russia has a territory too large and too rich to be able to maintain it without modern technologies that provide for the defence potential and security of its borders. The population of Russia is too great to pro-vide it with work only in the areas of production and transportation of raw materials. The economic struc-ture across Russia is too diverse and the technology sector is too complex to be able to maintain it without qualifi ed workers, engineers, scientists and teachers. The people of Russia are too intelligent and creative to be forced into mere consumption of the products of the qualifi ed labour of others.In recent years, Russian society (at least its politically active part) has come to realize that the technological challenges it is facing are of critical importance. Today it is hard to fi nd a person who would not agree that Russia must move from a raw materials-based economy to one based on innovation. The country desper-ately needs for its industries to be modernized; we need develop a national system that sustains innova-tion. To bring this to fruition, we need a consistent technology policy. The challenges can arise in the form and pace of solutions, but not in terms of their priorities. The key stage in the search for solutions to the technological challenges is the creation of a national system for supporting innovation.

1. What is the NISThe concept of a National Innovation Systems (NIS) began to be actively developed at the end of the 1980’s. It was pioneered by professor of Sussex University (UK) Christopher Freeman, who proposed both the term NIS itself and a list of its maxims in his work ‘Innovations in Japan’ (1987). According to Freeman,

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Birth of National Innovation System

Dan MedovnikovHead of Expert Innovation Bureau

Stanislav Rozmirovich, Tigran OganesyanAnalysts of Expert Innovation Bureau

NIS is a “network of private and state institutions and organisations whose activities and collaboration lead to creation, import, modifi cation and distribution of new technologies.”An alternative defi nition of NIS (of which today there are many) can also include the following:A National Innovation System is a historically developed sub-system of the national economy which consists of various institutions and economic structures which infl uence the pace and direction of technological changes within the society.The basis of the future concept of NIS was laid down in a series of research papers as far back as the 1960’s and 70’s, and its immediate precursor can be considered an American named Moses Abramovitz, who in 1986 published his now classic article in the Journal of Economic History “Catching up, Forging Ahead and Falling Behind.” It is this work that has examined the most important elements of the economic and tech-nological potential of diff erent counties and the factors infl uencing the dynamics of development of this potential. According to Abramovitz, in the aggregate a number of factors determine the so-called ‘social capability’ of a state. That is – their initial capacity to build up their economic and technological potential. And among the key factors he named the following: national technological competence (level of educa-tion), experience in organising and the management of large-scale industries and projects, availability of developed fi nancial institutions and markets, ability to mobilise an infl ow of the capital for such large-scale industrial projects, level of ‘honesty’ of various state and private institutions and public trust towards them, stability of the governmental authorities and their effi ciency in setting ‘the rules of the game’ and control over those rules.The wording used by Abramovitz is still relevant today. Another aspect of the ‘social capability’ concept proposed by Abramovitz has become the notion of ‘technological capability’ (the ability of a state to eff ectively use its technological knowledge), developed by Lin Su Kim, who on the basis of the analysis of the rapid growth of the South-Korean economy from the 1950’s to the 1980’s identifi ed three basic aspects of national technological capability:National technological capability is determined by innovation, manufacturing and investments. Countries aspiring to economic leadership should have their processes of attraction of investment, modernization of manufacturing, and development of innovation running in parallel and not sequentially.The recent appeal in Russia to fi rst modernize by importing technologies and only then start with the process of innovation is outdated. This was the path taken by under-developed economies operating without their own scientifi c and technological infrastructure and lacking educated specialists 40 years ago. We live in a diff erent time, and our country’s background is diff erent.

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INNOVATION SYSTEM

• A National Innovation System is a historically developed sub-system of the national economy which consists of various institutions and economic structures which infl uence the pace and direction of technological changes within the society.

Moses Abramovitz, the founding father of the concept of ‘social capability’ of countries in terms of innovation

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Despite globalisation, the researchers’ interest specifi cally in national innovation systems can be explained by the fact that the mechanisms for regulation of interchange of scientifi c and technological knowledge can be more distinctly seen on the level of NIS. As Jorge Niosi, professor of Quebec University notes, “if fi nancial capital crosses national borders relatively easily, the fl ow of knowledge over these borders takes place much more slowly, which is explained by the ‘more airtight character’ of the latter. In other words, much of this knowledge remains stored in people’s brains. The transfer of knowledge in turn is directly dependent on the transfer of human capital, whose mobility is rather limited. And the level of mobility fi rst of all is determined by the particularities of how the state regulates institutions and the level of effi ciency of various state and quasi-state institutions. When studying these factors one must bear in mind the presence of state borders.” The ideas expressed by Niosi are true even within state borders, so development of NIS usually bears a ‘nodal’ or network character. NIS grow locally, special zones with conditions especially favourable for innovations are created (often in the Greenfi eld manner), then the number of zones grows, and their experience is replicated. Today nowhere in the world do the NIS arise on their own. Rather, they are a result of purposeful state policies. They are very much hand-crafted. And there is nothing to guarantee their success. Even developed countries cannot always claim the success in the implementation of innovation strategies. For example, the EU plan adopted in 2000 in Lisbon for accelerated scientifi c and innovation development to catch up with the USA and Japan by 2010 been met neither in terms of quality nor

Correlation of Expenditures on R&D with the Number or Scientists and Engineers in Various Countries around the World (2007)


59

quantity, and the plan’s deadline has been pushed back. In his recent speech at the National Academy of Science, US president Barak Obama has also recognised a series of chronic problems in this area.In the development of a Russian NIS, it is important to look to the experience of other countries which have previously launched such projects. Attempts to create an indigenous NIS have been undertaken in a large variety of countries. And therefore the eff ectiveness of these activities each time strongly depended on whether national peculiarities were considered. It is quite curious to try and employ existing experience using the comparative approach, weighing the countries and their experiences against each other. It is not necessary to once again refer to the US’s Silicon Valley or India’s Bangalore or the ever so frequently mentioned Israeli centres for innovation. We have selected three pairs: Brazil and South Korea, Singapore and Malaysia, Finland and Norway. All of these countries have attempted to implement active innovation policies and have achieved certain, albeit diff erent, results. It is important for us that they diff er suffi ciently in size, geographical position, availability of natural resources, technological and educational backgrounds at the moment of the launch of innovation policies. They also have diff erent technological priorities and political instruments for the building of an NIS. But almost all of these examples have certain qualities similar to the situation in Russia.

2. How Did They Do ItBrazil: innovations out of a dictatorshipA surprisingly large number of research studies at the turn of the century were dedicated to a comparative analysis of the NIS of South Korea and Brazil. Perhaps this high level of interest can be explained by rather distinct diff erences in strategic approaches of these two countries towards the build-up of their techno-logical potential, which as a result has led to the fact that the Korean model turned out to be more eff ec-tive, as well as to the fact that in both countries for decades the national development strategy was being determined by the authoritarian military regime.In an overview article, “National Innovation Systems Overview and Country Cases,” Stephen Feinson points out that from the start of the 1970’s the military political leadership of Brazil has followed an ag-gressive strategy of import substitution, harsh limitations on the presence of transnational companies in the national economy and artifi cial stimulation of internal industrial growth through large-scale foreign loans and credits. This course of action led to the debt of Brazil growing to USD40 billion by the end of the 1970’s. At that time the national economy was suff ering from high infl ation and artifi cially maintained ex-change rates, and national companies were becoming less and less globally competitive.The overall leadership of the scientifi c and technology policies of the state since 1972 was exercised by the specially created Industrial Technology Secretariat of the Ministry of Industry and Trade. However, ac-cording to determinations of researchers, for many years the role of this Secretariat was rather limited and, rather, was focused on preserving national sovereignty by developing local technologies for the military-industrial complex and in a series of strategic sectors (fi rst and foremost in the oil and gas sector and in the agricultural sector).The three key problems of Brazil that have lead to a long stalling in its technological development: artifi cial barriers to the infl ow of new technologies, the low level of the R&D facilities of national companies and

• National technological capability is determined by innovation, manufacturing and investments. Countries aspiring to economic leadership should have their processes of attraction of investment, modernization of manufacturing, and development of innovation running in parallel and not sequentially.

INNOVATION SYSTEM

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their inability to convert new products into eff ective manufacturing solutions, a lack of indigenous skilled personnel.The overall course towards import substitution and minimisation of the outfl ow of foreign currency severe-ly limited Brazil’s opportunities for the purchase of new foreign technologies. The Brazil state agency FINEP, specially created to fi nance industrial R&D, over the fi rst 17 years of its existence had invested into the national economy as much money (recalculated in US dollars) as was on average being invested into the South Korean economy for the same purposes annually. For many years, 70% to 90% of total Brazilian R&D expenditures were directed to state universities and research institutions. The private sector employed less than 1% of Brazilian scientists and engineers.The situation with qualifi ed workers left much to be desired: in 1980 73% of the people employed in Bra-zilian industries and manufacturing had not fi nished elementary school. Out of the working-age popula-tion, the share of people that received higher technical and engineering education was extremely small. At the start of the 90’s it was still at 1.83% (by comparison, in South Korea this indicator was two times higher).Soon after the civilian government came into power in 1985, the country gradually began to adopt more liberal and open scientifi c and technology policies. A new Ministry of Science and Technology was estab-lished, and Brazil had moved to actively supporting foreign direct investments. However, the long term connection of the Brazilian authorities to strictly centralized planning was harshly limiting the positive ef-fect of these innovations as it was only aiding the rapid growth of the state bureaucratic machine.The new policy was heavily weighted toward maximising the infl ow of foreign currencies, while the limited portfolio of tax benefi ts as well as a weak system of protection of intellectual property did not at all help in encouraging the overseas multinational corporations to transfer their modern technologies and place their subsidiaries in Brazil.As for the few successes achieved by Brazilian companies on the global market (in aeronautics, production of motor engines and in some agricultural sectors), those were largely achieved in spite, rather than due to the awkward technology and industrial policies of the state.To be fair, Brazil has paid special attention to the building an industrial park infrastructure. So, for exam-ple, the construction of the largest national industrial park specialising in the sphere of ICT and aerospace technologies, Campinas Science and Technology Park, started back in the 1980’s. At present the country operates several dozens of industrial parks and the most active steps in this direction are being taken by the regional authorities of the state of San Paolo which, aside from the trademark Campinas, also has large industrial parks of São José dos Campos and São Carlos created working with strong local universities.

• The three key problems of Brazil that have lead to a long stalling in its technological development: artifi cial barriers to the infl ow of new technologies, the low level of the R&D facilities of national companies and their inability to convert new products into eff ective manufacturing solutions, a lack of indigenous skilled personnel.

• The new policy was heavily weighted toward maximising the infl ow of foreign currencies, while the limited portfolio of tax benefi ts as well as a weak system of protection of intellectual property did not at all help in encouraging the overseas multinational corporations to transfer their modern technologies and place their subsidiaries in Brazil.


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Korean Innovation HothousesUnlike their conservative Brazilian colleagues, the military leaders of South Korea started implementing an active and dynamic technology policy right after the end of the civil war in 1956. The fi rst target set was to provide a rapid infl ow of foreign technologies into the country. But as the main mechanism, they chose not the traditional means of stimulation of foreign direct investment and foreign licensing. Rather, they developed a universal scheme of mass creation of ready-to-operate factories (‘turnkey’ contracts) across all of the priority technology sectors (steel-rolling production, chemicals, paper, cement manufacturing etc.). And instead of licensing, South Korean economic ideologists preferred to use direct import of the key pro-duction means (machines and equipment). This approach, according to foreign analysts, turned out to be the most productive method of transfer of the modern technologies.The second most important target for national technology policy in South Korea became the stimulation of the use and adoption of newly-introduced technologies within domestic manufacturing. In essence, they chose a form of total import substitution, like Brazil. However unlike the Brazilians, the Koreans man-aged over a very short period of time to create an effi cient working system of tax benefi ts and eased other restrictions (including, for example, complete relief from the army service duty for the key personnel at priority manufacturing sectors) in order to stimulate the R&D activities of the national companies. Also, an important role in this process at its initial stage was played by the R&D centres purposefully created by the government. The statistical outcome of these measures looks very impressive: just in the period between 1970 and 1987 the number of private R&D centres in Korea grew from 1 to 604, and total expenditures on R&D in the industry grew from USD22 million to USD1.4 billion.Unlike the Brazilians, the South Koreans managed in a very short period to create an eff ective working system of tax benefi ts and eased other restrictions (including, for example, complete relief from military service for key personnel in priority manufacturing sectors) in order to stimulate the R&D activities of the national companies.The dynamics of changes in distribution of expenditures for R&D between the state institutes, universities and private fi rms also gives us a good example. So, if back in 1980 62% of total R&D expenditures were borne by state institutions and private companies only had a share of 28.8% (and 9.2% by universities), by 1990 the picture has changed dramatically. Private fi rms had now taken on 74% of all R&D expenditures. This is another important diff erence between the South Korean NIS and the Brazilian one: the percentage of state expenditures on R&D clearly was much more than that of private companies. And this trend has continued for several decades.And fi nally, the third key element of technology development strategy for Korea was the course it took in the mass export of products of national sectors. The South Korean government temporarily shielded its young and relatively small (in global terms) companies from harsh competition with foreign fi rms by se-lecting several strategic sectors whose enterprises were, in essence, placed in highly favourable conditions (again, by means of various tax benefi ts, preferential treatment for cheap credits, etc.). The success of this technology development strategy was made possible by establishing carefully considered ‘incubation peri-ods’, as well as well thought-through schemes for the gradual removal of such supports.The impressive long-term growth of the South Korean economy was also made possible by an eff ective

• Unlike the Brazilians, the South Koreans managed in a very short period to create an eff ective working system of tax benefi ts and eased other restrictions (including, for example, complete relief from military service for key personnel in priority manufacturing sectors) in order to stimulate the R&D activities of the national companies.

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state education policy. So, at the start of the 80’s, education received around 22% of the total state budget annually and these abundant expenditures yielded expected results: if in the mid-50’s only 22% of the Ko-rean population was literate, then three decades later it had reached almost 100%.Far more debatable seems to be the question of the role of various state institutions and departments in South Korea in the general coordination of the science and technology and innovation policies of the country. For many years the general responsibility for their planning and implementations was formally the purview of the Ministry of Science and Technology (MOST). However, according to both foreign and Korean analysts, the actual infl uence of MOST on these processes was rather limited. Far greater authority was held by the Ministry of Planning and Budget (MPB).In 1997, according to the new Special Law on Scientifi c and Technologic Innovations a new National Science and Technology Council (NSTC) was been created under the direct leadership of the President of South Korea. As a result, it was NSTC that received most of the authority and means of control over science and technology policies, which used to be distributed between MPB and MOST.Also, there were two important decisions of the South Korean government taken back in the mid-80’s in order to stimulate the development of small and medium businesses and the participation of the latter in the development of the high tech sectors. First of all, they created specialised ‘technology reserves:’ 205 industrial zones where all activity of the largest Korean chaebol-companies was prohibited (it is known that the fast growth of the latter in the national economy has been one of the reasons for the country’s economic slowdown in the recent two decades). And, secondly, one of the direct consequences of the new Act for the Formation of Small and Medium Enterprises, taken in 1986, was the rise of domestic venture capital in the country. The fi rst 12 mixed type venture companies arose as a consequence of this law (in Brazil venture businesses, up until very recently, did not even exist).At the end of the 90’s the South Korean government initiated an ambitious programme of accelerated de-velopment of a national network of industrial parks: just between June and December 1998 six new ‘mod-el’ industrial parks were set up (Songdo, Kyongbuk, Gyeonggi, Daegu, Gwangju and Chungnam). And fi ve years later, in 2003, after the offi cial declaration of a new strategy of the “balanced national development” orientated towards rapid economic growth in the rest of the country’s regions, the implementation of the second stage of the programme began and in the course of 2003-2005 eight more regional industrial parks were organised.A considerable disadvantage of the Korean NIS, which is recognised as its weakest link is a very low level of R&D collaboration between universities, state research institutes and the private sector (the same problem was noted by analysts in Brazil).According to the estimates of MOST, in the 90’s only 35% of all R&D was conducted jointly between South Korean industrial companies and state research institutions.This can be largely explained by a serious lack of state fi nancing for universities and research institutes,

• In 1997, according to the new Special Law on Scientifi c and Technologic Innovations a new National Science and Technology Council (NSTC) was been created under the direct leadership of the President of South Korea. As a result, it was NSTC that received most of the authority and means of control over science and technology policies, which used to be distributed between MPB and MOST.

• According to the estimates of MOST, in the 90’s only 35% of all R&D was conducted jointly between South Korean industrial companies and state research institutions.


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which has resulted in limited interest from South Korean industrial companies to collaborate with universi-ties and institutes in R&D.

Singapore: Betting on the TransnationalsThe economic development of Singapore has gone through the four key stages.First – from 1965 to the mid-70’s – the phase of the initial industrial growth, where there was much de-pendence on the transfer of the technologies from foreign multi-national corporations. The ‘artifi cial up-grade’ policy of the most labour-intensive sectors has meant actively attracting the foreign multinational corporations. Today as a result overseas subsidiaries of these companies are responsible for three quarters of the overall volume of industrial production in Singapore. And foreigners own more than 60% of the share capital of the country’s industrial enterprises. This harsh strategic linkage of Singapore to overseas technology sources at early stages of industrial development no doubt sets it apart from the rest of the ‘Asian Tigers’.During the second phase of strengthening of technology resources (from the mid-70’s to the end of the 80’s) the developers of the state technology strategy devoted their attention to stimulation of rapid growth of local supporting sectors.The third phase (from the late 80’s to the late 90’s) saw increased attention in the development of applied R&D. Again, fi rst of all this was seen with local subsidiaries of foreign multinational corporations, as well as through the active creation of new research institutes and organisations mainly specializing in the IT-technologies, electronics and, later, in the life sciences. This was meant to support the R&D development carried out by many subsidiaries of overseas companies.And, fi nally, the fourth phase, which commenced at the end of the 1990’s, the leaders of Singapore set forth an ambitious goal of fast growth of national hi-tech manufacturing on the basis of priority develop-ment of fundamental science and technology research and development, vigorous stimulation of local hi-tech start-ups and a special focus on the growth of the IT and biotechnology sectors.The state organisation in charge of the general coordination of the industrial and technology policies of Singapore is the National Science and Technology Board (NSTB). To support the development of the prior-ity telecommunications sphere they have created the specialised Ministry of Communication and Infor-mation Technologies and two government agencies: Infocomm Development Authority (IDA) and Media Development Authority (MDA). In 1996, the government of Singapore initiated a new long-term project, the so-called Innovations Pro-grammes whose purpose was to develop the science and technology base to stimulate of creative re-search. Another recent project, the Intelligent Nation initiative, is a ten-year plan for accelerated develop-ment of the IT and telecommunications sphere and it started in 2006 (its key developer – the governmen-tal agency IDA).It is also important to mention the programme for the accelerated establishment of the Singapore national system for biotech innovation.The state ideologists of the biotech programme have set an ambitious target of an annual growth of the bio-tech-sector of Singapore of 6%. A separate scheme of large-scale state fi nancing for new projects was developed for these purposes.

• The state ideologists of the biotech programme have set an ambitious target of an annual growth of the bio-tech-sector of Singapore of 6%. A separate scheme of large-scale state fi nancing for new projects was developed for these purposes.

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So, in order to attract the leading foreign compa-nies for the implementation of large-scale R&D in Singapore, a special Biomedical Science Investment Fund was created with USD600 million in seed cap-ital. Also, a new ‘target’ venture company Singapore BioInnovations (SBI) was created, with a declared investment capital of USD21 billion intended both for the creation of new national companies and for active participation in various foreign bio-tech projects. And fi nally, the government of Singapore has initiated the active creation of research allianc-es with the leading bio-tech companies (one such examples – an alliance between one of the largest pharmaceutical companies of the world, Eli Lilly, and the National University of Singapore for joint clinical medical studies and trials).In Singapore, as in other countries, the key element of the NIS development programme is a strategy for the creation of a sophisticated network of sci-entifi c and technology parks. The fi rst one of those,

the Singapore Science Park (SSP) was set up by the government as far back as 1980 and became the basic incubator for the new hi-tech companies of the country and its main centre of the national R&D which de-veloped applied industrial R&D research.Inspired by the example of many years of successful development of the SSP, at the turn of the century the government of Singapore initiated a new ambitious techno-park project – bulding from scratch (in an area more than 200 ha) of the hi-tech complex One-North Science Habitat. This was intended to integrate already existing and the newly created R&D centres with a focus on fundamental developments in science and tech-nology.From 2001-2015 Singapore is planning to spend around USD9 billion on this new super-project. The fl ag-ships of the modern Singapore hi-tech are actively developing on the territory of the One-North Science Habitat complex – these are two principally new techno-parks, Biopolis, specialising in biotech, and Fusionopolis, orientated towards IT and basic sciences.

Malaysia – In the Multimedia Corridor The NIS development and strengthening strategy of Malaysia is based on the Vision 2020 programme – a long-term plan for its economic development. The main object of attention of the state authorities for a many years has been the ICT sector. The key state institutions of Malaysia that coordinate the policies in this sphere are: the Ministry of Science, Technology and Innovation, the National Information Technology Council, the Ministry of Information and the Malay Development Corporation.The National Information Technologies Council (NITC), created in 1994, is led directly by the Prime Minister of the country and is the chief developer for state strategy in the ICT sector.

• The National Information Technologies Council (NITC), created in 1994, is led directly by the Prime Minister of the country and is the chief developer for state strategy in the ICT sector.

Fusionopolis – the Singapore techno-park, specialising in IT and basic sciences


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The Malay Development Corporation coordinates the work of the so-called Multimedia Super Corridor (MSC) – the key scientifi c and technology cluster of the Malay economy. MSC is a kind of expanded ver-sion of the Singapore techno-park system, but with a narrower sectoral linkage (again, fi rst and foremost to the ICT). The MSC formally includes the capital of Malaysia itself, Kuala Lumpur, as well as fi ve priority infrastructure projects: the Petronas twin towers, the new political and administrative capital Putrajaya, the futuristic ‘city of smart research and development’ Cyberjaya, the Technology Park of Malaysia and another tower in the capital – the Kuala Lumpur Tower.From the start of the 1990’s the Malay government has considerably increased its eff orts to turn the country into one of the leading world ICT centres via large-scale investments into a whole range of specialised pro-grammes focusing on the rapid development of the infrastructural and institutional parts of the sector. In par-ticular at the present as part of the MSC eight ambitious projects are being carried out at the same time – these projects are aimed at attracting the global leaders of the sphere to base their research centres in Malaysia.The government of Malaysia is aggressively increasing the volume of state fi nance into the R&D: so, if in 2000 the share of the country’s GDP expenditures on R&D was at 4.8%, by 2005 it had already exceeded 7% (in terms of this indicator Malaysia today is among the world’s leaders).On the whole, if you compare the NIS strategies of Singapore and Malaysia, it’s possible to notice many similar traits. For example initially both countries made a great emphasis on attracting foreign transna-tional companies to the process of the country’s development technologically and in innovation. And at a more advanced stage the state policies of both countries began to gradually move towards sup-porting the growth of the national technology potential. Both Singapore and Malay governments have supported the development of a large network of science and hi-tech parks via the ongoing invest-ment of state funds.At the same time it’s not diffi cult to spot a number of important diff erences in the evolution of the NIS of these two countries. First of all it is evident that the industrial-technological policies of Malaysia have thus far been much less successful and versatile: the development scheme chosen by the leaders of the coun-try shows much more diversifi cation across sectors and key areas (so, while both countries have devoted much attention to the ICT cluster, Singapore, in the course of several decades, has been actively develop-ing its fi nancial institutions and transport infrastructure, and in the recent years has placed a big bet on the bio-tech sector and on the rise of the basic sciences). As a result, at present the NIS level of Singapore is much further ahead of its neighbour Malaysia. And this is not only due to a greater grasp of the hi-tech sectors, but because of the great complexity and technological superiority of the products of the Singa-pore companies.

Finland – Harmony of the State-owned and the PrivateFinland was one of the fi rst countries in the world to adopt the new concept of NIS as a basic element of its technology and innovation policies.Among the key Finnish institutions and organisations that comprise the basis of its NIS, at the moment are the following:• Finnish Academy of Sciences• National Technology Agency of Finland (TEKES)

• The government of Malaysia is aggressively increasing the volume of state fi nance into the R&D: so, if in 2000 the share of the country’s GDP expenditures on R&D was at 4.8%, by 2005 it had already exceeded 7% (in terms of this indicator Malaysia today is among the world’s leaders).

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• A number of state research and development organisations• technology transfer agencies• Providers of fi nance resources (venture companies and funds, state investment agencies etc.).The National Technology Agency of Finland (TEKES) is a division of the Ministry of Trade and Industry, the main government organisation responsible for the technology policies of the country. It provides active fi nancial support to private companies involved in risky technology projects (through the provision of grants and discounted loans), as well as fi nancing various programmes for state research institutes and universities in the applied technologies.Also, TEKES coordinates launch, implementation and investment support for technology companies carried out by private companies, universities and research institutes. And finally TEKES actively participates in the coordination of a whole range of joint international scientific and technology projects.The next level of the Finnish NIS (state R&D organisations) is comprised of numerous universities, polytech-nic and national research institutes as well as the Technical Research Centre of Finland (VTT). The overall contribution of this level into the total amount of state expenditures of R&D is around 30%. The remaining

• A survey of managers of Finnish fi rms conducted in mid-90’s has demonstrated that 40% of the companies actively participate in collaborative initiatives with universities and state research institutions (one of the highest levels among the OECD countries).

Share of Venture Capital Investments as a percentage of Gross Domestic Product (GDP) (as of 2008)


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70% is contributed by private companies: the share of the sector’s expenditures exceeds 2% of the GDP of Finland and continuing to grow.Research in the Finnish NIS continues to demonstrate that one of the country’s most important elements is the availability of strong and stable connections between the three key groups of developers of new tech-nologies – private companies, universities and state research organisations.A survey of managers of Finnish fi rms conducted in mid-90’s has demonstrated that 40% of the companies actively participate in collaborative initiatives with universities and state research institutions (one of the highest levels among the OECD countries).Another eff ective mechanism of the Finnish NIS is the availability of a wide network of providers of fi nance resources for innovation, both from state and from private sources. As a result of the signifi cant liberalisa-tion of the Finnish fi nance system in the mid-80’s, the country has seen a rapid development of the venture capital market, whose total volume in just fi ve years, between 1995 and 2000, grew more than tenfold, and around a third of all the venture investments in this period fell to the ICT sector.The leading role in the investment process is played by SITRA (The Finnish Independent Innovations Fund) founded back in 1967. Its budget since 1991 has been under the direct control of the national parliament. SITRA provides venture capital for start-up companies (for a long time its priority areas were biotech and medicine), always acting as a minority investor. Aside from these activities, the fund also actively supports the establishment of business contacts between small and medium entrepreneurs and business-angels.According to the new development strategy of the fund, over the last few years its activity is gradually moving towards the fi nancing of multi-purpose venture projects.SITRA fi nances programmes to increase the energy effi ciency of the Finnish economy, to grow the mechanical engineering sector, accelerate the development of country’s regions, strengthen the role of municipalities in the technology development, as well as the grow the state’s leadership and management capacity (development of new management and operational models for the increased effi ciency of the public sector)The second state investment agency after SITRA is the Finnish Industry Investment Ltd, which invests in various venture capital funds, as well as directly into start-up companies across various industrial sectors (in collaboration with private co-investors).An important role in the Finnish NIS is played by the Council on Science and Technologic Policies (STPC). This Council is chaired by the prime minister of the country and is in charge of the general coordination of national innovation policiy, acting as a mediator between various ministries on technology matters. It also set the strategic budget guidelines for state research organisations for three-year periods, aids in organis-ing wide-ranging discussions on the issues connected with innovation activities of all participants across the country.A special feature of the Finnish NIS is a focus on state technologic strategy in regional development. Since the late-80’s as one of the key mechanisms for maintaining steady innovative growth of the regions, they have been using a programme to create a large network of technology parks and centres of scientifi c and technical expertise. These technology parks serve as a base for various spin-off projects and incubators.

• SITRA fi nances programmes to increase the energy effi ciency of the Finnish economy, to grow the mechanical engineering sector, accelerate the development of country’s regions, strengthen the role of municipalities in the technology development, as well as the grow the state’s leadership and management capacity (development of new management and operational models for the increased effi ciency of the public sector)

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Finnish Incubation ModelForeign analysts maintain that the ‘ideal incubation model’ in Finland has not yet been invented. They often ex-amine the capital research cluster Viikki Biocentre and the technology centre and incubator Innopoli in Espoo-Otaniemi. Both centres were organised by the capital city’s universities (Helsinki University and Helsinki Univer-sity of Technology respectively) as the two most successful examples of a gradual approach to such a model.Viikki Biocentre, located on the the campus of Viikki University in the capital was created in 1995 and became the core of the Helsinki Science Park which also includes the the Agriculture and Forestry De-partment building, a student village, a bio-tech incubator and a residential area for visiting teachers and scientists. This bio-centre is made up of general and research institutes of the Helsinki University: the de-partments of biology and pharmaceutics, applied chemistry and microbiology and a separate institute of biotechnologies are represented. At the moment Viikki Biocentre is one of the leading European research centres across a whole range of cutting-edge biotech areas of study, including molecular biology, cytology, proteomics, and neurobiology and more.Innopoli was built by the joint efforts of the city municipality of Espoo and a group of private Finnish industrial and insurance companies. In this multi-purpose centre, the majority of the research, busi-ness and training facilities are concentrated in the Otaniemi Science Park – including the key division of the Finnish Technical Research Centre (VTT) for the transfer of technologies – Finntech. The Otanie-mi Park also has a sophisticated system of business incubators. The Helsinki University of Technology has played a key role in the creation of the International Innovation Centre Otaniemi, a new centre for international technology transfer, research in new technologies, recruiting and business services.Also, a special mention should be given to the unique hi-tech cluster Oulu in the North of Finland (600 km from Helsinki). Its rapid growth started in 1974 after the Finnish government passed a decision on the crea-tion of a department of electronics of the VTT in this region. Since then Oulu has turned into one of the largest hi-tech centres of Northern Europe, which today accommodates the work of more than 800 foreign and national companies with a total annual turnover of around USD4 billion. About one quarter of all of the Finnish hi-tech companies are located there.The main source of growth of the Oulu region was and still is the export of electronic and IT products, and the most important role in its development was played by the key player in the Finnish high tech world – Nokia.Another key factor has become the availability of strong connections between the companies of the Sci-ence Park, the University of Oulu and other state research organisations.The success of the Finnish ICT sector is directly connected with a stable infl ow of skilled workers into the largest companies. From the early 80’s Nokia and other Finnish hi-tech fi rms have for many years invested considerable sums into specialised corporate staff training programs and this was often supported by the national universities. As a result of this carefully considered policy, in the course of just fi ve years, between 1993 and 1998 the number of Finnish students has almost doubled and the number of polytechnic univer-sities has grown threefold.

Norway – Resources without a CurseNIS of Norway unlike that of Finland, as a rule, is not considered by researchers as very successful. Some scientists connect this with the so-called curse of natural resources, a consequence of which was the lack

• The main source of growth of the Oulu region was and still is the export of electronic and IT products, and the most important role in its development was played by the key player in the Finnish high tech world – Nokia.


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of any serious damage to the Norwegian economy from the energy crisis of the mid-70’s (in marked con-trast to what was experienced by European countries, including Finland). Today it is evident that this crisis has acted as a sort of a catalyst for the subsequent dynamic rise of the Norwegian hi-tech sector.The ‘Norway Boom’ was fi rst of all made for by the discovery of rich off shore oil and gas deposits, the ac-tive development of which started in the fi rst half of 1970’s. No doubt, Norway was not the only Northern European nation to discover large deposits of hydrocarbons in the open sea in the 60’s-70’s: Great Britain, Denmark and the Netherlands have also received signifi cant dividends from this ‘gift of nature.’ Nonethe-less, the general cumulative eff ect turned out to be most noticeable for the Norwegian economy which managed, unlike its geographic neighbours, to carry out an extensive innovative transformation of its oil and gas industry in a relatively short period of time.By the end of the 20th century, most Norwegian exports were based on the products from the natural resources and energy sectors. Oil and gas took leading positions in budget statistics, the metallurgy industry was the second largest source of export proceeds. The fast growing export proceeds from the oil and gas (and also partially the metallurgy) sector allowed the Norwegian government to implement in the course of the 80’s-90s a more expansive fi nance and currency policies as compared to most of the other West European states. This has lead to average rates of economic and employment growth in Norway being considerably higher in the last two decades of the 20th century, and unemployment rates were noticeably lower than in Western Europe overall. And today, the Norwegian GDP per capita has exceeded the average level of the leading Western European countries by almost a quarter. And, even though the share of oil and gas sector in terms of the general employment structure across Norway throughout the second half of the 20th century has remained relatively small, its dynamic development has aided the rapid expansion of market opportunities for national companies in other industrial sec-

Troll A Platform in the Norwegian sea - the largest off shore gas platform of the world with a weight of 656,000 tons and 472 meters high, 369 meters of the structure is underwater.

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tors and the service sector, many of which have also been connected with extraction, processing and the exploitation of various natural resources.The availability of most of these resources was caused by the specifi c geographic location of the country – with its variety of sea fauna and fl ora which have naturally stimulated the growth of the fi shing indus-try and sectors connected with the industrial breeding of fi sh and other seafoods. Also, the mountains of Norway have allowed for the development of the mining industries and the production of hydroelectric power. The latter has created the basis for the national electro-metallurgic and chemical industries. Nor-way, with its long coast, has also made possible the rapid raise of the national ship building industry, which in the recent years has undergone a serious process of restructuring with the main focus on production of specialised vessels and equipment for the industrial development and exploitation of oil and gas fi elds.Practically all of the resource-intensive industrial sectors of Norway (production of oil and gas, aluminium, ship-building, fi sh breeding, farming etc.) over many decades have seen high levels of innovative activity compared to other sectors of the economy.These sectors have been seen a constant replenishment, both from internal sources (thanks to cooperation with the state universities and scientifi c research institutes) and through an intensive transfer of foreign technologies (the eff ectiveness of the latter was, according to the experts, largely due to a very high capac-ity within Norwegian companies to integrate new technologies).Firms of the ‘supporting’ sectors, such as ICT, engineering and other business services have also consider-ably increased their sales on the rapidly growing market, where development was supported by an active protectionist state policy.Also, large manufacturing companies (Norsk Hydro, Statoil and others) were and still are a foundation of the industrial system of Norway and accordingly play a very important role in the R&D. However, from the 60’s a new generation of companies also appeared in Norway which, despite being signifi cantly smaller in size, had a much higher level of R&D activity. In the 70’s and 80’s these companies achieved particularly signifi cant results, but also after a diffi cult period of restructuring in the 90’s most of them managed to sur-vive and retain high potential up until today.However one of the brightest demonstrations of the general dynamism of the Norwegian economy in the last 30 years is the steadily high pace of growth in productivity of labour, which on the average has in-creased 2.5% annually since 1975 (OECD, 2007). This impressive economic statistic stands in contrast, how-ever, with the data on the level of R&D investments:The share of Norwegian GDP expenditures on R&D is only at 1.6%, which is signifi cantly lower that the average indicator of the leading West-European countries. Moreover, the Norwegian economy still shows a persistent domination of state fi nancing of the R&D sector (and this is mainly universities and research institutions, not state enterprises).

• Practically all of the resource-intensive industrial sectors of Norway (production of oil and gas, aluminium, ship-building, fi sh breeding, farming etc.) over many decades have seen high levels of innovative activity compared to other sectors of the economy.

• The share of Norwegian GDP expenditures on R&D is only at 1.6%, which is signifi cantly lower that the average indicator of the leading West-European countries. Moreover, the Norwegian economy still shows a persistent domination of state fi nancing of the R&D sector (and this is mainly universities and research institutions, not state enterprises).


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Another disadvantage of the Norwegian NIS, according to many analysts, is the fact that the development of new industrial sectors in Norway that are less closely connected with the resource-intensive technolo-gies sees noticeably much slower growth rates despite the generous support from the government. None-theless, as professor Fagerberg suggests, the low level of R&D intensity is only one of many factors that reveal the dynamics of the innovation processes in a national economy. And this data about the levels of R&D investment should not be viewed separately from other important aspects of innovation-orientated activities in the sector and across the nation.So an important indicator of a nation’s ability to determine, absorb and eff ectively use new knowledge is the level of education of the population and, mostly, the levels of higher and higher technical education. In this respect Norway (also like Finland) is far ahead of the most of European countries. Another strong ele-ment of the Norwegian NIS, according to Fagerberg, should be a high rate of distribution of knowledge dif-fusion and cooperation of various economic agents in the process of innovation activities, as well as close and stable connections between the producers and the consumers of hi-tech products and equipment.

3. What’s In Russia?For such a large and diverse country as Russia there is no ready recipe for innovative development. How-ever it’s easy to name the obvious particularities that should be considered in such a recipe.First of all, it should be noted that we must start building the NIS not from scratch, from the point of view of innovation, (as it was in the majority of countries, in Brazil, Malaysia, Singapore, and South Korea). Russia has its own tradition of organisation of industry, science and education. In the course of the entire 20th cen-tury our country managed to conduct its own research and development across almost all of the technol-ogy sectors and become one of the world leaders in terms of technology. The start of the century, despite all diffi culties, was also not lost in vain. Over the last decade many institutions important for the function-ing of NIS have been created. The question is how these institutions with the scientifi c and technological potential remaining from the previous century can be made compatible with a comprehensive NIS.We have to create our NIS using an already industrialised economy. This is connected with the fact that Russia has to combine the process of technical modernization and the creation of original technologies

Choice of Development Strategies for the Russian Industrial Enterprises(In % of the number of responders)

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and products (innovation). As we have seen, even in the ‘new innovative countries’ these processes take place rather quickly in parallel. Secondly, Russia has considerable supplies of natural resources. On one hand this abundance creates the ‘resources curse,’ when the high profi tability of investments into the extraction of these resources takes in-vestment resources away from the processing industries and the high-tech sector. On the other, it provides a rather large and solvent market for new technologies and products. It is evident that a considerable part of Russian industries (including the hi-tech) must work to provide the need for the development of these natural resources (as it happened in Norway).In a sense, human capital can also be classed as part of ‘natural resources’ –that is, the outstandingly creative people of our country. Their ability to adapt to the hardest and most unfavourable living con-ditions, fi nd solutions to the most diffi cult situations, come up with the unpredictable solutions to the trickiest tasks – these are the distinct traits of our countrymen in the opinion of people from other coun-tries. We should also add that Russia has one of the highest levels in the world of people with secondary and higher education (especially technical engineering, which is quite in contrast with, for example, the Brazilian situation).Thirdly: for the scope of Russia we still have a weak infrastructure: transport, telecommunications, energy – this is a great challenge for the political elite, businesses and technocratic society. Just to create of a new system of transport communications (high-speed rail and auto transport, organisation of urban transport fl ows, regional aviation, network of transport hubs and logistics centres, system of cargo delivery to sepa-rate territories) could become a mighty engine for the development of innovation for our country.

Number of Times the Topic of Innovation was Covered in the Media

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Main Innovation Development Institutes and Instruments Description 2010

Russian Foundation for Basic Research

Founded in April, 1992. Purpose: to select and support fi nancially promising research projects (grants). Financing: 6 percent of the Federal Budget funds allocated for science.

Expenditure: 6 billion rubles

Foundation for Promotion of Development of Small Businesses in Science and Technology

Founded in February 1994. Purpose: to fi nance R&D of small innovation entities and create a chain of innovation technology centers (29 ITCs throughout Russia). Financing: 1.5 percent of the Federal Budget funds allocated for science.

3.45 billion rubles appropriated

Russian Venture Company Founded in June, 2006. Purpose: to promote development of innovative industries and introduce Russian high-tech products in the world market. Financing: 28.2 billion rubles (the RF contribution to the authorized capital).

Volume of transactions of the RVC Seed Fund: up to 440 million rubles, formation of new specialized funds totaling up to 11 billion rubles.

Russian Corporation of Nanotechnologies (RUSNANO) state corporation

Founded in October 2007. Purpose: to assist in the implementation of the government policy aimed at making Russia one of the world leaders in nanotechnology. Financing: 130 billion rubles (the RF property contribution).

54 billion rubles have been additionally allotted to RUSNANO “to provide the RF government guarantee for securing return of capital of the loans taken by the corporation for its investment projects”.

Russian Scientifi c Centre The Kurchatov Institute

Founded in February, 1943. Purposes: to create a technological basis for innovative economy, provide priority development of science and technology and faster manufacturing application of scientifi c research results, provide for complete cycles of innovative research and development, including creation of industrial prototypes, in the top-priority fi elds of science, technology and machinery.

The RF government has allotted 23.1 billion rubles for the Program of Joint Activities within the framework of setting up the Research Center The Kurchatov Institute for the period to 2012.

Federal Special-Purpose Program: National Technological Basis

Period of implementation: 2007–2011. Main purpose: to provide for rapid development of the manufacturing industry by creation and implementation of breakthrough, resource-saving, environmentally safe industrial technologies. Coordinated by the Ministry of Industry and Trade. Total fi nancing: 99.4 billion rubles, including 49.5 billion rubles from the budget, with the remaining funds raised from non-budgetary sources


Federal Special-Purpose Program: Development of Nanoindustry Infrastructure in the RF

Period of implementation: 2008–2010. Main purpose: to create an up-to-date infrastructure for the national nanotechnological network intended for the development and implementation of the nanoindustry potential. Coordinated by the Ministry of Education and Science. Total fi nancing: 27.7 billion rubles, including 24.9 billion rubles from the budget, with the remaining funds raised from non-budgetary sources

5 billion rubles appropriated

Federal Special-Purpose Program: Research and Development in Top-Priority Fields of Science and Technology in Russia

Period of implementation: 2007–2012. Purpose: to develop scientifi c and technological potential in the top-priority fi elds. Coordinated by the Ministry of Education and Science. Total fi nancing: 195 billion rubles, including 134 billion rubles from the budget, with the remaining funds raised from non-budgetary sources


Federal Special-Purpose Program: Scientifi c and Educational Human Potential of the Innovative Russia

Period of implementation: 2009–2013. Purpose: to create conditions for reproduction of scientifi c and educational human resource potential and retain youth in science, education and high technologies, provide for continuity of generations in science and education. Coordinated by the Ministry of Education and Science. Total fi nancing: 90.5 billion rubles, including 80.4 billion rubles from the budget, with the remaining funds raised from non-budgetary sources


Source: Expert magazine, offi cial websites of organizations, open publications


75

Fourth – the scale and the diversity of the country highlight the great role of the state necessary to main-tain and develop this territory. As a result the strong state and state policies play and will continue playing a leading role in the forming of the Russian NIS, especially at the start of large projects when the govern-ment will have to implement ‘mandatory innovation.n.Fifth – a huge territory with regions that are quite diff erent from one another in social and economic terms predetermines the nodal nature of innovation development. Innovation will take place in the regions most prepares for it. All the claims that the specially created innovation centres will draw the resources away from other regions and thus slow down their innovation development are just not worth the attention. The history of NIS tells us that at the start it’s almost always the case that it always happens like this. Over time the formation of a network of centres of innovation activities, scattered across the whole country, will be-come an important factor in the connectivity of the regions.(The fourth and the fi fth particularities will be examined in more detail).

Phases of the Big WayRussia went through several stages in the development of its innovation policies. Essentially, any kind of systematic work to form Russian NIS was commenced only in the 2000’s. Early on, occasional and incom-plete decisions were taken, which had various degrees of eff ectiveness. This could not be seen as any kind of unifi ed policy. And even in the 2000’s, these policies came to the foreground of the state priorities only by the end of the fi rst decade (let’s note that by then in such ‘new innovative states’ as Finland, Singapore, South Korea their eff ective NIS have already been constructed).The fi rst stage (2000–2005) saw an orientation towards the implementation of particular projects, identifi cation and support of capable teams and institutes. The main bet was placed on the direct stim-ulation of the innovation activities by fi nancing the innovation infrastructure and providing grants to small hi-tech enterprises. Particular attention was devoted to the creation of the personnel base of the innovation system, the fi nancing of education and training of personnel (mainly of management and innovation companies).Starting from 2005 a new emphasis was placed of the development of the infrastructure of the innova-tion activities and project instruments for the solution of tasks fi nanced by the budget, fi rst and foremost with the use of the Federal Target Programmes. State aid to develop an innovations sphere was aimed mainly at the forming a series of elements lacking in the national innovations system – for example, ven-ture companies, special economic zones, techno-parks, commercialisation centres and so on.So, at the very start of 2005, Russia had organised six special economic zones (SEZ) including four with a technology focus: in Moscow (Zelenograd), Moscow Oblast (Dubna), St-Petersburg and Tomsk. 33 billion roubles was allocated for the fi nancing of these special economic zones, 19 billion of which came from the federal budget, 14 billion – from regional and municipal budgets. Today 175 residents have been registered. 30 thousand workplaces have been created as a result of the SEZ, and 140 thousand more are planned for creation.In the summer of 2006 the Russian Venture Company (RVC) was created. The RVC invests its funds into the innovation sector through private venture funds, providing each one of those with 49% of invest-ment resources. Over the time of its existence RVC has created 7 funds. The total capitalization of these funds is 19 billion roubles; these funds have already fi nanced 26 innovative companies.In 2007, Russian president Vladimir Putin approved a Nanotechnology Industrial Development Strategy. One of the key elements of the newly formed national nano-technology network was the creation of the Russian Corporation for Nanotechnologies (Rusnano) with an allocation of no less than 130 billion roubles. On April 1st 2008, Rusnano started considering project applications that sought fi nancing. By

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mid-2010 Rusnano had approved 82 projects with a total amount of investment from Rusnano of 130 billion roubles. Rusnano partners have also taken it upon themselves to invest an additional 150 billion roubles.At the end of 2007, another hi-tech state corporation was created: Rosatom. This is a federal executive body for the atomic energy and nuclear weapons complex of Russia. The assets of Rosatom are valued at approximately 1 trillion roubles and include science centres, 10 closed cities, 10 atomic stations, uranium mines, a uranium processing nuclear fuel plant, and companies and facilities for nuclear and radiation safety. Rosatom annually invests more than 6 billion roubles in science and development.

The Engines of InnovationKey institutions and mechanisms for supporting innovation and their respective budgetsBy the start of 2009 it became clear that all of the measures taken in the fi eld of innovation have their limitations, as a consequence of both internal and external factors. First of all the implementation of the measures was thwarted by the world economic crisis. One of the reasons for this crisis was not only the general collapse of the world fi nance institutions but also a search for a new global economic and technology paradigm.A momentous event was a meeting on the issues of modernization and technology development of the economy held in May 2009. During this meeting, President Medvedev stated that “despite correct programme goals, no considerable changes have taken place in the area of technology in our economy. Until now no serious results have been demonstrated by neither small fi rms, nor the techno-parks, nor in any of the technology transfer centres, nor by the Russian Venture Company and nor the special economic zones dedicated to technology.” To change the situation the president made a decision to create a special

President of the Russian Federation Dmitri. Medvedev has made a decision to create a Commission for Modernisation and Technological Development of the Economy


77

Commission for Modernisation and Technological Development of the Economy.In autumn 2009 Dmitri Medvedev stated the need to create in Russia a powerful Centre for Research and Development. In March 2010, a decision was made to create it in the Moscow suburbs of Skolkovo. It is expected that an innovation city will be created around the Centre. This will be a special territory for innovative development with the R&D centres of the largest Russian and foreign companies. It will include a university, business incubators, and representative offi ce of venture funds and consulting companies.

4. The Visible Hand of the StateForeign researchers claim that alongside the economic (and historical and technological) prerequisites for the creation of a successful NIS, the most important factor defi ning the effi ciency of national innovation strategies should be the quality of state leadership and the ability of political leaders to plan and realize large-scale innovation projects.This factor for NIS success is no doubt one of the most frequently mentioned by many diff erent researchers and from the late 1990’s the number of such works in the specialist publications has been solidly growing.Experience from around the world shows that the tasks of creating separate elements of the NIS should be tied all together. Its formation can’t be a prerogative of one ministry and needs to be coordinated by not only diff er-ent departments, but also by diff erent partners within the economy and society. Sometimes a special ministry can be created for these purposes, a committee or a department that would regulate the innovative develop-ment issues. As an example of such a department let’s recall the aforementioned National Council for Science and Technology led by the president of South Korea. Sometimes these tasks are handled in a diff erent manner: a general action plan is developed, and then it is integrated into the policies of each separate ministry and depart-ments (this was done, for example, in the USA). What course will be chosen by Russia is so far an open question, yet more and more people are in favour of creating a special department. So far the country lacks an authorita-tive centre for management and proper coordination of the activities of the various departments in this area. The existing ministries cannot cope with this task and there are no appropriate structures at the presidential and governmental levels.It might be interesting to note that back in 2001 in a report from the leading US think tank, the RAND Corpora-tion, an Agenda for the American Administration was actively promoted. This report suggested that the govern-ment “appoint one person to coordinate national responses to emergent technology challenges.” However the administration of George Bush Jr. never heeded the advice of RAND. The current president of the US, Barack Obama, has taken this idea seriously and after winning the election stated that he intends to introduce a special new position of CTO (Chief Technology Offi cer) whose key role would be to “control and provide the state and all of its federal agencies with the necessary infrastructure and the best technologies of the 21st century.” In addi-tion, Barack Obama has more than once stated the need to “renew and strengthen the status of the president’s advisor on science and technology, who would at the same time carry out the duties of the head of the Admin-istration on scientifi c and technical policies of the White House.” The president seeks also to appoint “people with a strong science and technical background” to a number of key positions in his administration and government Noble Prize Laureate Stephen Chu, who was appointed to the post of the US Department of Energy is a good fi rst example of the president wanting to carry out his intentions.

• The most important factor defi ning the effi ciency of national innovation strategies should be the quality of state leadership and the ability of political leaders to plan and realize large-scale innovation projects.

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Today the leaders of our country, and in particu-lar the president and the prime minister, devote enough attention to technology problems and are prepared to set specifi c targets before the state administration and the country as a whole. How-ever, at lower levels of government- in depart-ments, state corporations, regional administrations the level of understanding of the scope of danger in this area is considerably lower. As a result, the signals from above and even direct orders are slowed down and blocked. A single chance that a project might be realized only occurs in the cases of direct control of its implementation by the high-est authorities as it is happening, for example, with the nano-technology initiative of Putin and the Skolkovo initiative of Medvedev.

The reason for which our elite so grossly underestimates the risks in the area of technology development has to do with the fact that over the last 15 years their attention was primarily concentrated on the issues of redistribution of property and funds and not on matters of industrial policy, technical modernization, scientifi c and technical development, and related areas. As a result a whole class of administrative staff has formed (and not only in the state administration but in business as well) who consider that their knowledge of economics, fi nance, human resources management and PR, not to mention their ability to build ‘social networks,’ is quite enough for successful management. Matters are further complicated by problematic manpower policies: clan structures and an emphasis on loyalty to personalities outweighs professionalism in government.A possible solution to the personnel impasse: to attract technocrats into government: people who have an understanding of the substantive processes of these or other sectors.We are talking about involvement at the higher levels of government of specialists with technical engineering and scientifi c backgrounds and with work experience as engineers, builders, and production managers.Innovation ConstraintsThis is the phrase that some openly liberal professors use to scare their students. An R&D plan is not just une-quivocally passed down to an enterprise from a ministry or a set amount of funds invested into the innovations. There are some rather mild instruments to ensure innovation. In this respect the most frequently used instru-ments are technical, environmental, and energy safety regulations.First of all it is important to understand that the best means of driving Russian companies to innovate is the devel-opment of competition on the internal market. Nothing is more motivating than competition and this goes for the use of new technologies, development of new products, the use of new organisational solutions and sales systems, and the search for the new markets. In other words, everything that we understand in connection with the word ‘innovation’ applies. So, the primary objective for the state should be in assisting the development and support of healthy completion in the country’s economy, including by attracting foreign manufacturers to Russian markets.At the same time, the situation with competition across the diff erent segments of the economy has become

Nobel Laureate in Physics Stephen Chu became the US Secreatary of Energy

• A possible solution to the personnel impasse: to attract technocrats into government: people who have an understanding of the substantive processes of these or other sectors.


79

strongly diff erentiated and therefore the state must employ various instruments in order to stimulate innova-tion. Let us outline examples of some of these instruments that could be most eff ective today.Technology CorridorsTechnology Corridors is a list of obligatory demands and limitations of the technical parameters of the technologies used, of consumer products and services that are set by the state. From year to year, these requirements become more and more stringent. These are not only technical regulations but a whole system of regulations organised in a chain of interrelated limitations aimed at altering the technology level of a particular sector. For this the state will need to set defi nitive indicators for ecology, security, and energy effi ciency that should be achieved by companies by a set date.Most of the developed countries these days regulate the environmental activities of enterprises not by the means of imposing limits on emissions but by the Best Available Technology mechanism (BAT). Within the BAT methodology, the emission levels are at the value allowed for by the latest technology solution. A list of such technologies is determined by a special group of experts and is approved by governmental de-crees and must be regularly renewed. The timeframe for converting to such norms is fi xed for a long-term period where the ‘corridors’ are set for decades ahead. An important important example in Russia were the EURO 1,2,3,4 motor engines developed with the use of BAT methodology; or regulations on noise emission for aviation engines. In practice, however, this methodology is hardly used in the Russia. This is the case, for example, with the transition to the automobile gasoline norms or associated gas recycling.It might be the case for a compulsory transfer to more energy-effi cient equipment within a set amount of time (for example to fl uorescent light bulbs, electric motors with a smooth-start system, construction materials and structures with exclusive standards on thermal conductivity and so on). Another area is regulating the safety of foods (in terms of preservatives and additives, microorganisms and pesticide content). Introduction of such reg-ulations not only reduces the energy consumption of the domestic economy but also takes care of the health of the population, and encourages manufacturers to turn to the developers of new technologies, thus forming a long-term demand for their services.

Antimonopoly Regulations The current antimonopoly policy views monopolies as an absolute evil. At the same time concentration in a few companies might be the only way to achieving global competitiveness. It is necessary to supplement the state antimonopoly policies with a series of instruments that would allow the state to regulate the concentration processes in the national economy in connection with the technology development solutions. So, for example, concluding agreements on mergers or acquisitions could be linked to setting particular conditions where the emerging monopoly must within the set term convert to a certain new technology. If they fail to do so, a fi ne could be imposed, or other punitive measures could be applied, including a possible compulsory reorganisation and division back into the previous companies.Licensing ConditionsRequirements related to technologies used or to the technological level can be set when issuing a company with a certifi cate or a license. Also, as in the cases with the technology corridors, it should not seek to encourage the use of a particular technology, rather the focus should be achieving specifi c indicators (of eff ectiveness, degree of extraction, environmental indicators, etc.). Opportunities for State SupportProvision of state support can be connected with certain events for innovation development and in participation in priority innovation projects. For example, the 2009 Crisis Management Programme of the Government of the Russian Federation had clearly stated rules that “the state will fi rst and foremost support enterprises with a programme of innovation development which include measures to increase energy

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effi ciency, the development and roll-out of new products, and the implementation of new technologies.” Requirements for companies participating in tenders to sell services or products to the state can be formulated in the same way.Access for Transnational Corporations and Terms for LocalisationExperience in other countries shows that foreign investors should not only be able to operate in an investment-friendly environment, but also some requirements must be set. These requirements concern the transfer of technologies, licensing, opening of not only branches and divisions, but also of research centres. In the Key Areas of the Crisis Management Activities of the Government of the RF for 2010 document it was noted that it is necessary to “form a mechanism for administrative and fi nancial support of off set deals with foreign companies that are looking for gradual localisation of the production of hi-tech products and equipment. This includes open centres for applied research and developments in Russia. It also includes creating engineering centres and taking new solutions to full-scale production, including through partnerships with Russian producers with a subsequent transfer of the corresponding innovation and intellectual property rights.” We will have to wait and see how this is implemented.Tasks for State CompaniesIn this area the state can set tasks for the achievement of technology milestones. State companies must be obliged to develop, adopt and publish their long-term plans and programmes in technology and innovation development. On the basis of these programmes they must annually create plans for prospective R&D and the development of new products and purchase of new technology. Information about these programmes must

Graph of a European Ban on the Use of Standard Light Bulbs...

...and This is in Russia.

2009 2010 2011 2012 2013 2014 2015 2016 Standard fi lament bulbsAll non-transparent100 Wt75 Wt60 Wt40 Wt25 Wt15 WtHalogen lampAll non-transparent220-230 V Current>750 Wt500 Wt300 Wt200 Wt150 Wt100 Wt75 Wt60 Wt40Wt25 Wt12 V Current100 Wt75 Wt50 Wt35 Wt20 Wt10 Wt5 WtFilament bulb with directional lightingStandardHalogen

2010 2011 2012 2013 2014 For state and municipal needs, only fi lament bulbs are used100 Wt75 Wt ? ?25 Wt ?

Data: Expert magazine, №9, 2009


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be presented to the respective ministries, to the Commission on Modernization, and it must be put into public domain so that potential developers could plan their activities. The state representatives in the executive bodies of the state companies must monitor the progress of development and implementation of these programmes. Each state company must have a certain amount of funds allocated to its innovation projects, an amount compatible to that allocated to companies abroad.Direct and Indirect Political PressureOne of the easiest means to mandate innovation is by applying direct political pressure on the management of the companies in order to achieve certain actions in the desired direction: an increase of the amounts of funds allocated to research and development, creation of corporate R&D centres and collaboration with existing in-stitutes, introduction of certain technologies, and more. It is important that when using this approach that not only state interests be considered, but also those of the company itself. For example it is preferable not to dictate what technologies must be chosen or who to collaborate with, and instead set targets that are based on achiev-ing certain indicators. And when insisting on increasing expenditure on R&D, for example, off er the company the option to create its own corporate venture fund whose funds will be under full control of the company itself.As for indirect pressure, we are talking about appropriate ‘signals’ made through the mass media, informing the managers and shareholders that only those who engage in innovation can expect benevolent treatment from the state.Breeding of ‘Champions’Aside from stimulating demand from already existing companies, it is also necessary to set a target for the pur-poseful formation of fundamentally new Russian hi-tech companies and world-class manufacturers. It would be necessary to create several world-class companies that would operate on the global market. They would es-sentially be transnational but with Russian control and would be among the largest world companies. There are

Share of Expenditures on R&D as a percentage of Turnover of Large Russian Companies

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many examples of this model in other countries in the past 30-40 years. Recall Nokia, Samsung, and Airbus.In the future it will be these companies that could become the axis of the real innovation system: manufacturers of components, developers of new technologies and solutions, and research organisations. It does not take all that much to create the leaders: the right choice of priorities, direct support at the highest levels, availability of the requisite monies and other resources. When creating such companies it would be right to guide ourselves not by available production capacities, but by the exciting prospect of developing the technology sectors. And we should be led not by political heavyweights but by innovative entrepreneurs who understand engineering and have real experience in rolling out innovative products onto world markets.

5. The Innovation NetworkIn today’s hi-tech business which can only be transnational, geographical distribution of the companies is the norm. Their divisions are located where key resources are available and where there are the most favour-able business conditions. As an example one could take one of the most famous hi-tech companies created by our countrymen: Parallels. It is registered in Singapore, its head-offi ce is located in Switzerland, the sales, marketing and business development divisions are in Seattle, and the development of new products takes place in Moscow and Novosibirsk. They also have offi ces in Washington DC, London, Paris, Munich, Tokyo and Beijing. As its founder, Sergei Belousov explains: “We must be closer to our consumer. In Russia there are engineers who are extremely good at writing and testing codes, but this is far from the full circle for soft-ware engineering. Aside from writing and testing code, there is nothing else for our company here. We are competing with global companies who hire high-class specialists who can not be found in Russia.”As we have already seen, in the world overall innovations are not thriving in equal measure across all countries, and even within one particular country they are located in separate places of the country where there are favourable conditions for innovation. And each of these centres specialises in a relatively narrow band of technologies. Russia, as the largest country in the world, is extremely diverse in terms of its socio-economic conditions, fi ts into this global tendency quite well. Starting from the reforms of Peter the Great, Russia has always had its ‘advanced’ territories where the high technologies of their time were developed (ship-building, weaponry, production of cast iron, printed cotton and china), which co-existed with regions stuck in their development. In the 19th century, the diff erence was that applied technologies were supple-mented by universities. The 20th century has made these localised centres into science villages and power-ful research institutes.Building NIS in Russia is most likely to go along the path of formation of several ‘centres of crystallization’ of innovation activities. Each of these centres will use a diff erent model of innovation systems. And these centres will not have to be tied to the borders of one particular region. In some places that might be a uni-versity or an academic research institution, somewhere a science village or a SEZ, and somewhere else it might be a holding company or a whole cluster of enterprises.It is important to gradually join these centres of activity into a system where collaboration takes place within and relies on its network to disseminate its experiences. It is necessary to set up an information exchange system. We must also note that the need for communications has been already acknowledged. In May 2010 in the course of the Tomsk Innovation Forum “The Memorandum on The Creation of an Intere-gional Association of Innovative Regions of Russia” was signed. The document was signed by the repre-

• If in the mid-1970’s 55% of the science and technology centres of large corporations were concentrated in the countries of the location of their head offi ces, in 2005 two-thirds of these science and technology centres were located outside those countries.


83

sentatives of eight regions: Tomsk, Kaluga, Irkutsk, Novosibirsk Oblasts, Krasnoyarsk and Perm Krais, and the Republics of Mordovia and Tatarstan. The fi nal agreement between the regions will be signed this autumn in Novosibirsk. While relying on the formation of a network, we shouldn’t at the same time rely on the processes of self-organisation alone. First of all this is because today it’s impossible to say that all the necessary elements for this network have been created. For example there is a tangible lack of presence of tran-snational corporations in Russia, as well as, concom-itantly, of their research divisions. All over the world the common trend for rapid internationalisation of R&D today is becoming more and more evident.If in the mid-1970’s 55% of the science and technology centres of large corporations were concentrated in the countries of the location of their head offi ces, in 2005 two-thirds of these science and technology centres were located outside those countries. In other words the R&D conducted by the largest global corporations at the moment are mostly out-sourced into regions with lower costs. And, according to the estimates of American analysts, more than 75% of the new R&D centres that are slated for opening by the global MNCs in the next few years will be located in Third World countries.Russia is clearly behind in terms of participation in these global processes, losing its fl edgling market in the out-sourcing of R&D to such countries as India and China. Some of the examples of how a transnational corporation has created a research centre in Russia are the Science and Technology Centre of Boeing, 6 R&D centers of Intel, the software development centre of Motorola, and Research Centre of Samsung Electronics. So far these are singular examples of pioneering companies. To make the number of such centres compatible to what is hap-pening right now in India and China and other countries in the South-East Asia, it is necessary to take certain focused actions and at the highest level. It is known that the success in attracting transnational corporations is always determined by the welcoming gestures of the leaders of the state: in Indian Bangalore they were invited

Sergei Belousov: “We are competing with global companies”

INNOVATION SYSTEM

Activity of R&D Centres of Transnational Corporations in India and ChinaChina:

- Number of overseas R&D centres of TNC – 1,100

- Number of employees in R&D centres of TNC – 130,000

- to the overall number of researchers – 9%

India:

- R&D expenditure of TNC - USD6.1 billion

- Number of researchers – 173,000

- R&D expenditures of Indian companies connected with export - USD3.3 billions

Sources: report of N. Ivanova, a corresponding member of the Russian Academy of Sciences, at the Russian Innovation Forum,

May 2010

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by Prime Minister Rajiv Gandhi personally; in Singapore, they were invited by the Prime Minister Li Kuan Yu; in Shenzhen (China) they were invited by past and present general secretaries of the Communist Party of China. The fact that none of the large transnational companies so far has become a resident in a Russian SEZ is also due to the fact that none of the leaders of the country has taken it upon themselves to do so.However, today the situation has dramatically changed. Less than a year ago President Medvedev an-nounced the necessity to create Russia’s own “powerful centre for research and developments”. Just half a year has passed since the day it was announced that the location for the construction of this centre will be the Moscow suburb of Skolkovo. And today we know that such world hi-tech leaders as Nokia, Cisco, Siemens, and Microsoft have expressed their desire to place their research divisions there, along with a series of other companies and venture funds who are currently in negotiations. And if this is really so and the transnationals have indeed showed some faith in the innovation initiatives of Medvedev, then ‘this is serious and will be a long-term commitment’, and all that remains is to build on these successes. Skolkovo, with its relatively small territory (only 370 ha), then becomes a kind of an ‘entry point’, a place where for-eign companies will receive the ‘golden ticket’ saying that their activity is supported by the central govern-ment. Then they will need experimental and production bases, qualifi ed and low-cost specialists. And for all of this, they will need the regions.And here we see the mechanism for SEZs devoted to technical development. Until today they have been in something of a limbo: recruitment of residents was going slowly and was almost accidental, and even those companies whose business plan were approved were in no hurry to fulfi l their obligations. With the arrival of the transnational companies, these SEZs gain a new lease on life. Around each of these compa-nies over time a conglomerate of smaller innovation companies and development teams is going to form, all of whom will be aiming to complete the tasks necessary for the ‘anchor’ residents. Also their usual part-

• Within this model, the Skolkovo Centre becomes not only an point of entry for transnationals into Russia and a spot for the placements of their R&D offi ces, but also a key hub for the formation of a national innovation network.


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ners from overseas will be able to join them here. This way, on the basis of a specifi c SEZ a whole particular technology cluster will grow, which would allow the Russian companies to develop their capacity not only in the sphere of technology, but in terms of global market collaboration and interaction with large hi-tech businesses. And within a few years these capacities will be realised by Russian companies independently.Within this model, the Skolkovo Centre becomes not only an point of entry for transnationals into Russia and a spot for the placements of their R&D offi ces, but also a key hub for the formation of a national innovation network.On the one hand, other innovation centres and foreign companies will be promoted through it, and on the other, innovative Russian companies that grown from this new infrastructure will gain access to high-tech grants, venture funds, consultants and key middlemen. And the role of the infrastructure for the growth of innovation will be played not only by such SEZs, but also at the next level: regional techno-parks, research universities and business incubators at academic institutes.Skolkovo may become an important hub in the innovation network for one more reason. Even now it has al-ready been decided to used a ‘virtual residents of Skolkovo’ model: companies may be registered in Skolkovo (and thus receiving the rights for the corresponding discounts and benefi ts), but work in other parts of the country. Also, having developed the procedures for providing discounts and benefi ts to the Skolkovo resi-dents and for monitoring their use, these benefi ts will be distributed gradually to other centres of innovation activity. At fi rst, this will apply to SEZs devoted to technical development. Then they will apply to techno-parks; after which they will apply to business incubators at universities and research institutes. In this case the Skolkovo centre becomes the control and coordination centre for the activity of its residence and regional centres of innovation activities. Skolkovo centre, provided with the support from the central government, will become a safe ‘protective cap’ that shields the growth of the innovative future from the cold winds of the Rus-sia’s harsh economic realities. It is only left to wait and see what’s going to grow under this cover.

6. What’s under the Cap? (In place of an Afterword)In spite of not the most friendly economic climate for Russian innovators, despite low demand for the new products, despite high death rates among the technology start-ups, over the 20 years after the start of economic reforms a considerable number of these companies have nonetheless survived and adapted to these conditions. The Russian innovation world has acquired experience of not only failures but also suc-cesses. Today we can not only lament the diffi cult fate of Russian science and technological industry, but also discuss the actual results of the projects that have already been realized and specifi c problems of par-ticular companies. There aren’t many such companies, but they do exist.Statesmen must from time to time divert their attention from their debates over legislation bills to focused work with entrepreneurs who over the last decade have managed to build their business from the ground up and who have technical expertise and are able to bring innovative products to the market. Today our innovative fi rms do not grow well, they encounter serious barriers at every stage of their development. Let us take a look at why this happens and how to eliminate these barriers for each particular company. Yes, this is going to be a hands-on approach to innovation management, but if we do not push forward one, ten, or a hundred innovation companies and don’t determine how this is done, all of the discussions about the importance of innovations will only be abstract.So far it is possible to distinguish three groups of potential recipients of such assistance who require a dif-ferentiated approach within the forms of state support.Projects originating from the system of the Russian Academy of Sciences and higher education institutions, and implemented by small companies with annual proceeds of 100 thousand to 1 million USD are at an early stage. These companies will need support from the state while transitioning to mass production and while

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setting up a regular and continuous production supply of consistent quality. Also, they will need assistance to structure business and establishment a stable management structure. Their key problems include: the need to establish strong connections with the production centres, as well as an opportunity to receive reduced (or even free) fi nancing for the business plan of the project. If the state could- having selected approximately 1,000 deserving projects and having provided them with appropriate support- provide for the transition to the next stage of at least 100 of those companies – this would be a considerable success for an innovation policy.The next stage concens companies with proceeds of 1 million to 10 million USD. For them a key question becomes the development of a sales network and receiving investments, credits or loans for the expansion of production. As there are no appropriate support mechanisms in place, access to investments is very limited for smaller fi rms: their risks are too high and they can’t provide appropriate securities for bank credits. And to gain access to the funds distributed by the Federal Targeted Programmes they do not have suffi cient experi-ence, authority and connections. They need regular orders from key consumers within the country. From the state they will need support in setting up marketing, sales, service, in the perfection of design (ergonomic design), in the creation of a security system for protection from crime and corrupt offi cials. The target goal for the state support should be to transfer at least 10 out of 100 such companies onto the next stage.

Growth of Russian Innovative Companies


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For those fi rms which have managed to reach the sales level of 10-100 million USD the investment issue is not so pressing anymore. They can receive credits, they know how to approach the ministry and win the tender. The new problem for the growth of innovation companies within this segment in Russia is an extremely small volume of the inner market itself and low demand for new developments – fi rst of all from large industries. A move to foreign markets and attracting investments into main capital could help over-come this limitation. But for a transfer to the global market they lack the appropriate qualifi cations. They will need support in building up their foreign-trade activities, in the development of government relations, in the creation of the correct corporate structure, in an entrance to the fi nance markets, and in M&A deals. They should be provided with a considerable share of foreign contractors (10-30%) in the proceeds. Unfor-tunately (or fortunately) the task of selecting is here eased by the fact that today the level of USD10-100 million in sales has been surpassed by very few technology companies. If we could lead at least a few of them onto the level of USD100 million – 1 billion in proceeds, this would mean that they have managed to enter the ranks of the largest Russian companies. And this radically changes the economic landscape of the country and the perception of the issue of innovation by the people.As for the companies that have approached one billion USD in turnover – here the build-up of success of the innovations business depends not on the funds for expansion and not even on an ability to establish client relationship within or outside Russia. Here they will need to have, fi rst of all, a mechanism to attrac-tion money from the funds market. Secondly, they will need to form various types of partnerships with the state. Thirdly, they will need a sizeable class of consumers who are innovators. And fi nally, they will need to be able to create fundamentally new markets.

Works Cited1) Fagerberg, Jan & Srholec, Martin (2007) “National innovation systems, capabilities and economic development” (Working Paper on Innovation Studies, University of Oslo)2) National Innovation System: Experience of Select Asian Countries (2005, Proceedings from Working Seminar, New-Delhi (India))3) Stephen Feinson (2002) “National Innovation Systems: Overview and Country Cases”4) Nelson, R. and Rosenberg, N. (1993) “Technical innovation and national systems”5) Kate Ho and Katharina Luban (2004), “National Innovation Systems: A case study of South Korea and Brazil”6) Trevor Monroe (2006), “The National Innovation Systems of Singapore and Malaysia”7) “Evaluation of the Finnish National Innovation System”, Policy Report (2009), www.evaluation.fi 8) Fagerberg, Jan et al. (2009) “The evolution of Norway’s national innovation system”9) Wicken, Olav (2007) “The Layers of National Innovation Systems: The Historical Evolution of a National Innovation System in Norway”10) Getz, Daphne & Segal, Vered (2008) “The Israeli innovation system: An overview of national policy and cultural aspects”11) “National innovation systems: Finland, Sweden & Australia compared” (2005, Report prepared for the Australian Business Foundation)12) Gernot Hutschenreiter (2009) “OECD Review of Innovation in South-East Asia”13) Balzat, Markus & Hanusch, Horst (2004) “Recent trends in the research on national innovation systems”14) Niosi, Jorge (2002) “National systems of innovations are “x-efficient” (and x-eff ective). Why some are slow learners”15) Freeman, Chris (1995) “The 'National System of Innovation' in historical perspective”16) Innovative Sweden. A strategy for growth through renewal (2004, by Ministry of Industry, Employment and Communications of Sweden)

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‘My greatest wish is that we focus on human resources’Dmitri Medvedev, June 01, 2010

In place of an introduction The following version of the Human Resource Support Concept Paper (here on ‘HR Concept’) for the Russian Workforce Reorganization Program (here on ‘the Program’) is proposed to briefl y evaluate the current situation and develop recommendations on national human resource management in order to implement programs under consideration to upgrade, technologically reform, shape and develop an innovative economy for Russia.

The HR Concept is developed based on the following assumptions:Assumption 1There is clear agreement on key attributes of Russia’s long-term development, the vision, mission, strategic goals and objectives for the reorganization of Russia’s workforce as expressed in the body of the Program. There is understanding of the content, form, timing, and other features and components of the Program,

and implementation is expected to take ten years or more.Assumption 2 The key attributes and statements used in this HR Concept are based on similar program documents: the‘Russia-2020’ Concept and in papers by the Presidential Committee for Modernization and Technologi-cal Development of the Russian Economy (here on ‘the Committee’).Assumption 3 This HR Concept Paper is based on strategic management methodology, the aim of which is to facilitate achieving social and economic targets. As we work with this methodology, we take our ‘corporate’ strategic goals (or level-one goals) and we consider Russia’s national development goals stated in the Program. Those goals are ‘sustained economic growth, higher incomes and improved living standards, reliable na-tional security and ensuring that the constitutional rights of Russian citizens are adhered to.’


Human Resource Support for Th e Russian Workforce Reorganization Program

Vadim MarshevProfessor of the Management Department, Economic Faculty, the Lomonosov Moscow State UniversityMember of Board of Directors, the Summa Capital

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Assumption 4. The Program sees the National strategy as a means to achieve strategic goals at the national level for Russia as a whole. These goals are ‘Modernization and sustained growth and devel-opment of an innovative economy in Russia.’1 National strategy is viewed by the HR Concept Paper as what might be called ‘a corporate strategy for Russia’s social and economic development.’Assumption 5 Russia’s corporate strategy is to create ‘an innovative economy and to modernize the nation’s workforce.’ At the same time this is also a second-level target for the strategic management of socio-economic systems. It is implemented (or ‘achieved’) through numerous other means or so-called product strategies2 for Rus-sia’s socio-economic development.Seen as ‘product strategies’ today, there is a set of ‘13 related program areas’, eight of which are outlined in the ‘Russia-2020’ Concept Paper, and fi ve more are refl ected in documents of the Modernization Commit-tee. Also there are product strategies for to create a number of social institutions (such as law, healthcare, education, culture, security, the labor market, and others).Assumption 6 Product strategies also are third-level targets in the strategic management of socio-economic systems. They are implemented (or ‘achieved’) through a variety of means or an array of so-called functional strate-gies3 for Russia’s socio-economic development.As key functional strategies that assure implementation of ‘product strategies’, we mean typically strategies for the fi nancing, production, marketing, management, logistics, sales, R&D, and for human resources.Assumption 7 The object of the HR Concept stated herein is Russia’s human (or labor) potential4. The subjects that the HR Concept Paper aims to address include the processes that shape, support and develop Russia’s human potential. The paper seeks to address these processes in the context of the human resource sup-ply as part of implementing the national strategy, This paper also includes a focus on ‘education’ (or ‘human development’) as a key component of ‘human capital’ and as a system that works with human resources5.

1. The Relevance of Human Resources for A National Modernization ProgamBackground. Modernization is understood as an improvement process in relation to society’s mechanisms for economic, political, cultural and social development. Typically, a nation embarks on modernization when it is confronted with extraordinary circumstances, when lagging behind more advanced nations becomes palpable and unbearable. Military defeats and emerging geopolitical threats are often seen as an

1These are seen as realistic goals. In more detail, the national strategy includes the following means to achieve the national goal: - promotion of private enterprise and competition; - effi cient social and industrial policies; - harmonious interaction between business, government and public; - strong (but not too strong) government; - better quantity of public institutions (protection of ownership rights, independence and integrity of justice, lower corruption level, strong rule of the law, better quality of government); - ensuring high level of human resource capital; - modernizing the nation’s production forces; - building and developing an innovative economy.

2Formally, a corporate strategy is the algebraic total of realized product strategies, which taken together creates a synergistic eff ect. In real life, this means implementation of development strategies within 13 industries and a range of social institutions.

3Formally, a product strategy is the algebraic total of realized functional strategies, together creating a synergistic eff ect.

4The term ‘Concept Object’ in the text of the HR Concept Paper is synonymous with the term ‘Control Object’.

5The RF Federal Act ‘On Education’ No. №3266-1 of July 10, 1992 understands education as a purposeful process to rear and educate the individual in the interests of the individual, society, and government, confi rmed through educational levels (qualifi cations) offi cially established and awarded by the government. The Russian system of education has established education levels of six types: basic general education, secondary (comprehensive) general education, primary education, secondary education, higher education, and post-graduate education.

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indicator that it is time for modernization, as was the case in Russia following her loss Crimean War of 1853-1856, or after military failures and economic stress during World War I. According to historians, Russia has made over 200 attempts to launch concerted campaigns that can be regarded as modernization programs. Among the best prepared - but not always successfully implemented- there were numerous reforms in the Russia of 1860-1880s. Russia’s economic backwardness at the time was the primary impulse to change, and to fi nd the human resources and other means to implement the reforms.That was also a time to consider the causes of failed reforms and to propose action to eliminate those problems. A low level of competence and a dearth of qualifi ed managerial, engineering and line staff have been cited as main causes for those unsuccessful reforms . At that time many articles and books were pub-lished, off ering explanations, individual recommendations, and even comprehensive programs to secure human resources for both ongoing and planned reforms in Russia. Here are some of the most thought-pro-voking (and still relevant) quotations from materials and publications from Russia of the 19th century.For example, Russian revolutionary democrat N.A. Serno-Solovyevich described the ‘adverse conditions’ (of an intellectual, economic, natural and political nature) in which Russian industries found themselves. He proposed a series of measures to eliminate such ‘conditions’6. As part of his plan, he proposed educa-tional measures: ‘Training for the people must be mainly practically and technically focused. We have very few workers: specialists, equipment operators, and technicians. Factories and machines that are com-missioned in Russia without foreign aid are few and far between. Yet our people by their nature are highly gifted in this respect. But talent alone is insuffi cient. They need positive awareness. And thus, to institute various real trade schools is among the most signifi cant issues for the Russian industry. They need good teachers. However, it is doubtful that they are enough at this time. Teachers must be trained, and it is only abroad that they can be trained. Training outside of Russia must pursue two objectives. The fi rst objective is academic: to train teachers. The second objecti is pragmatic: to improve various sectors of our industries. Another measure that would achieve the same goal is to concentrate all special institutions, now subor-dinate to diff erent departments, under the Ministry of Public Education, and transform them into insti-tutions similar to a polytechnic school, but ensure that they remain open to the public.’Another Russian, А.P. Schapov,7 proposed a broad-ranging plan for industrial and managerial popular education and projects for natural-science and economic associations. Their main goal was to ‘dissem-inate knowledge among the people.’ He maintained that it was necessary to begin public education ‘from establishing schools for natural sciences, economics, for industrial and engineering education’. Along with grammar schools that give general education, ‘we need secondary engineering and industrial schools... They would prepare engineers, machine operators, agronomists, stock-breeders, shop fl oor foremen and managers.’ His system includes post-secondary vocational training: ‘along with higher general-education schools – universities and academies – we also greatly need special post-secondary institutions to teach economics, industry and technologies... Such post-secondary vocational institutions, as well as their de-partments, can be as varied as there are diff erent parts of the natural economy. Or the variety of schools may refl ect the many diff erent key areas in which there is a need for labor. For instance, we may need academies specializing in agronomy, cattle-farming, engineering or industrial manufacturing, mechanical science, forestry, seafaring, mining, architecture, or, among others, zoological business, mining industry, and others’The most systematic and comprehensive project supporting reform ideas was the ‘Project for a General Plan for Industrial Education in Russia,’ written in 1886 by I.A. Vishnegradskiy, a renowned scientist and profes-

6“О мерах к умножению народного богатства и улучшению материальных условий народного труда в России» (‘Ways to Augment Public Wealth and Improve Material Conditions of Public Works in Russia “ (1858)

7In his ‘Realism as Applied to Public Economy’ («Реализм в применении к народной экономии») St-P, 1866.


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sor of the St. Petersburg Institute of Technology.8 From the beginning, the text of the ‘Project’ articulates what is necessary for developing this plan. First, the plan should be properly harmonized with the needs of the industries. ‘Industrial education must train only those who are truly capable for industrial employment. Students must be equipped with the necessary knowledge and skills so that without any signifi cant diffi cul-ties and following not too lengthy a course of practical study prior to graduation, they can become useful agents in their respective area and in the corresponding level of an industrial profession.’ The plan must be unique in each of its parts, according to the fi ve hierarchical levels of the structure of managerial and production-related human resources that are described below. As a plan for special education, it must be coordinated with the ‘system of corresponding grades in general education,’ to continue and complete the respective general training. The plan must train the specialist only for the practical activity of a specifi c level. And it should not aim at each of the fi ve steps to prepare the student for a ‘school that trains specialists of a higher grade. Practice shows that schools that try to achieve both such targets will deliver neither.’ And fi -nally, an ‘industrial education plan must possibly include or at least not exclude the existing fairly numerous technical and trade schools.’ And the plan should work to correct their apparent fl aws.The plan follows to disclose fi ve categories (‘degrees’) of managerial and industrial staff that are required for the industry and for which the plan was prepared.

These are engineers with experience, ‘training in science and technology, able to improve production 1. based on recent domestic and international achievements, prepared to challenge successfully diff er-ent industrial institutions, both in terms of better manufacturing quality, and in terms of cutting the related production costs’. I. Vishnegradskiy believed that in the absence of such engineers, ‘the nation will be doomed either to stagnation and gradual degradation of its industries or to permanent de-pendence on foreigners.’These are ‘industrial managers competent in business. They are aware of the technical intricacies 2. and are able to independently handle the commercial aspects of an industrial enterprise, even in the broadest possible scope. They are knowledgeable enough in technologies’ to discuss technical im-provements with engineers.These are technicians, the engineer’s right-hand men, who must possess information needed both for 3. ‘substantial and correct maintenance of production’ and project design and research.These are foremen, who ‘are very aware of the technological aspects of manufacturing and are able to 4. manage the workforce. They are suffi ciently informed to see that their workshops achieve the best in-dustrial results.’These are workers, who are guided by their foreman to accomplish tasks trusted to them ‘with good 5. precision and accuracy.’ For workers, it is of utmost importance to ‘ensure overall development, to be moral, and to have a conscientious attitude to work...’

The Project elaborates on the requirements for each human resources category. It evaluates the organiza-tion of training, the detailed contents of training courses, curricula and programs, education forms and timetable, gives estimated costs of training for each human resource group, provides a list of requisite new institutes, vocational and trade schools, training workshops, and their distribution over Russia. As he de-scribes his new proposals, the author of the Project keeps comparing them to the situation then in relation to the question under consideration. Also, he tries to identify best ways for ‘seamless’ transition from the obsolete pattern to a new one.Broadly speaking, the role of training and of education as a spiritual component of Russia's workforce was traditionally the focus of attention of Russian statesmen and scientists during the 19th century. Their inter-

8Russian Minister of Finance from 1888 to 1892.


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est in the problems of education was not just idle. It was consistent with the main direction in which the national system as a whole was evolving. It included society’s economic, social, cultural and political com-ponents. To quote Dmitry Pikhno, Professor of Kiev University, ‘The people’s level of education is one of its greatest forces. In addition to general and occupational knowledge given by schools, sciences and literature, popular education or culture matters greatly. Together they create a vibrant cultural life’9. His colleague from Moscow University, Prof. Ivan Yanzhul, expanded the notion of man’s spiritual nature as a special factor in economic growth. In his ‘Value of Education for Success of Industries and Trade’ (1899), building on ideas from his precursors, I. Vishnegradskiy among them, he wrote: ‘Literacy alone is far from enough to ensure successful growth and promote welfare in the nation. Using primary education as the basis, we need to ensure that specialized knowledge for the people, dissemination of technical learning and other types of occupational training are made accessible. Without this knowledge no industry can progress in the nation, not even folk crafts’. But unlike his predecessors, I. Yanzhul promoted an original factor to support the devel-opment of the nation’s workforce, the manufacturer’s integrity. This is very signifi cance in today’s global crisis. He wrote, ‘Not only is a manufacturer’s physical nature relevant, but also his spiritual nature. We can see that the scope and the quality of production depend to a great degree on the education and training of the producer. This seemingly forgotten factor of man’s spiritual nature in turn is approached in two ways. First, it is seen in terms of reason in the narrow sense of the word, as developed by education or enlightenment. And the second aspect is morality, also known to be the man’s spiritual integrity’10. According to him, the most signifi cant of spiritual qualities is honesty, which in civilized nations is ensured by the most exacting legislation and rigorous enforcement. This thus emphasizes the value of institutional elements for the socio-economic development of the nation. ‘No matter how many schools we build in Russia, as long as the value of honesty is lacking, we cannot ex-pect successful progress in creating wealth among the people.’11 ‘And people who are honest are thereby strong not only in their morality, but in their economic strength’12. As Yanzhul maintained, Russia at the end of the 19th century saw an acute need for profound socio-economic and broad cultural reform to educate new morally strong generations in both of the ways he mentioned: ‘…it is only by exerting infl uence on both educational development and moral improvement and especially honesty that we can grow and estab-lish our true culture on a foundation which can become solid and durable’13

Analysis of the current situation The reason we pay so much attention to the background of the issue and Russia’s experience in pre-paring for and seeing through reforms is merely because we adhere to the following tried and trusted principle in any fi eld of action: ‘Anything that is new is a fresh arrangement of the old’. Any new recom-mendations on human resource support for modernization of the present-day Russia will be sound and expressed not so much through fundamentally new statements about the human resources system for contemplated transformation, rather it will be conditioned by specifi c new goals and objectives, by the nation’s new internal resources (including accumulated experiences), new opportunities of the milieu and challenges.The processes that have been occurring in Russia in the last decade recall the situation in Russia of the second half of the 19 Century. The consequences and aftereff ects of internal and external processes have

9Русские экономисты (XIX - начало XX века) (Russian economists (19thto early 20 century)). М.: RAS Institute of Economics, 1998. p. 148

10Янжул И.И. Экономическое значение честности: забытый фактор производства. Избранные труды. (I.I. Yanzhul Economic Value of Honesty: Forgotten Factor in Production. Selected Works) М.: Nauka, 2005, p .402

11Ibid. p. 406-407

12Ibid. p. 418

13Ibid. p. 420


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fi nally confronted the modern Russia’s economy with long-term systemic challenges which now require a systemic response. The following challenges are the most momentous and acute14:Intense global competition, aff ecting not only traditional markets of commodities, capital, technologies and labor, but also national management systems, support for innovation, and the development of hu-man potential (emphasis by author – M.V.)A new expected surge of technological changes to boost the role of innovation in socio-economic devel-opment, which now dampen many traditional factors for growth.The growing role of human capital as the main factor for economic growth .The exhausted potential of the pattern of exporting raw materials as a driver of Russia’s growth.Limits to growth of Russia’s economy caused, among other things, by a shortage of skilled engineers and workers.A number of social and institutional problems that remain unresolved.These challenges required a conceptual response from the nation’s leadership, government agencies and private business, resulting in the development of a series of programmatic documents. Key among them are the ‘Russia-2020’ concept and provisions stated by the President, including at the St. Petersburg Inter-national Economic Forum (June 2010), as well as in the materials of the Presidential Committee for Mod-ernization and Technological Development of Russian Economy.As we have stated our assumptions above, let us restate the vision, strategic direction of the nation's devel-opment and national strategy described in the ‘Russia-2020’ framework:Vision. In the 2015 – 2020 period, Russia must rise to the status of a leading world power of the 21st Cen-tury, take a front-line position in global economic competition, join the top fi ve nations in GDP (parity of purchasing capacity), and become the most investment-attractive economy in the world.Our strategic goals include attaining a level of economic and social development that commensurate with the above status, reliable national security and the assurance of citizens’ constitutional rights. This calls for achievement of high standards in personal security, ready access to the service of education and health care of the required quality, the necessary level of housing availability, access to the benefi ts of cul-ture, and assurance of environmental safety15. As a vehicle to attain the ambitious vision and strategic goals, the national strategy was developed and adopted for implementation in 2008: ‘Modernization and sustained dynamic growth and development of innovative economy in Russia’. In terms of strategic management, the issue in question is the so-called ‘combination corporate strategy’ which is a balanced blend of components of strategies for concentrat-ed growth, integrated growth, diversifi ed growth, and even a cutback strategy 16.‘Modernization and the development of innovation in Russiam’ a national corporate strategy, can and must be realized through development of all industries of the national economy (as national product strategies), as a balanced symbiosis of modernization in the traditional sectors of the Russian economy (oil and gas, raw materials, agriculture, transportation, etc.) have accelerated the development of high-tech industries and innovative products.The question arises about how to ensure realization of the goals to shape, stabilize and develop product strategies, to achieve the national strategic goals for the 2020s and 2030s. While fi nancing, the legal envi-ronment, the scientifi c knowledge base, natural resources, plants and equipment, and other elements are important in achieving these goals, human capital is key both at the national level and at the level of indi-

14According to ‘Russia-2020’ strategy

15For example, as stated in the ‘Russia-2020’ strategy, higher and high-school vocational education is expected to cover 60 - 70 percent of citizens by 2020 (compared to 50 percent in 2007).

16If necessary, these items can be further detailed and illustrated with examples.


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vidual businesses. This is the resource that can take on a special role in Russia’s modernization, stabilization and the development of an innovative economy in Russia.The planned workforce reorganization, modernization and development of innovation in Russia depend more on the quality of their use rather than on mere availability and quantity of material, fi nancial, natural and other resources. Human capital is the universal resource thanks to which Russia will be able to compe-tently create and use such resources, ultimately rising to the position of a global intellectual leader capable not only of reproducing ideas in science and technology but to generate them domestically. And this re-source will ensure high living standards and for all citizens, and it will allow for the exporting of high-end products and will attract both people and capital.Without underestimating the importance of all other means used to implement the national strategy, we need to identify the ever-growing role of the subjective factor that manifests in a number of ways. First, it is the proactive and creative approach practiced by industrial leaders and rank-and-fi le government offi cers, managers, specialists and employees of private manufacturers. Second, it is the ability and resolve of gov-ernment offi cials and business people to adopt and follow the new course for implementation of an inno-vative method of industrial development. Third, it is the readiness and commitment to innovation among executives and specialists at all levels. And fi nally, it is creative action by the people working to build and develop a culture of innovation in Russia.However, as of this date, Russia is confronted with the problem of adopting and managing innovative processes at all development levels and stages of public production. Innovation introduced by companies are ineffi cient, there is not adequate return on outlays for innovative product development, innovative ide-as become obsolete even as they are developed and improved, and so on. According to a poll at the 2010 St. Petersburg International Economic Forum, conducted by the NES (New Economic School), Pricewater-houseCoopers Russia, RVC (Russian Venture Company) and RUSNANO, one of the key causes identifi ed was ‘a shortage of managerial resources able to implement innovative projects and a shortage of employ-ees with a capacity for innovation.’17 Paradoxically, Russia is also a nation where each US dollar invested in personnel yields USD2.7 in revenues, or 20% above European performance.In 2008, the government of the Russian Federation (RF) began implementation of ‘Russia-2020’. One of the objectives of the program’s fi rst phase (2009-2012) envisages investments in human capital, which includes skill improvement and ‘innovative’ education for personnel. After 2.5-3% of the GDP is achieved, investments in personnel must grow from 0.6% to 38% of total investments in innovation.18 But even with this level of investment, the total spent on development of human potential lags far behind similar spending rates of the most advanced Western nations. To compare, let us consider the fi gures for Russia and Germany (see Table 1). Although Russia has been reforming its education system for the past 10-15 years, the results of such reform are much worse in terms of quantity than quality (speaking of conclusions and results), since, as experts note, the technocratic (asocial) approach and philosophy of total market relations dominate the reform of the fi eld of education proper.19 Virtually all quantity performance indicators in public education in Russia have soared.20 ‘Market relations’ in education prevail if we compare the rates at which students

17Innovative Activities of Large Business in Russia: Mechanisms, Obstacles, Perspectives .2010.

18Report by RF Prime Minister Vladimir Putin ‘Russia 2020’. – Moscow, 2008

19Человеческий капитал и образование (Human capital and education). М., TEIS, 2009, pp. 200-201.

20According to the Russian Federal Census, between 1989 and 2002, the number of occupational graduates (per 1,000 adult population) rose from 113 (1989) to 160 (2002); undergraduate – from 17 to 31, secondary training from 192 to 271. Meanwhile, the number of persons decreased with general primary school (129 to 77) and no education (65 to 10). The number of colleges grew 1.7 times during those years (federal and municipal schools – 1.2 times, private schools 5.5 times); total number of students increased 2.8 times (including federal and municipal schools 2.4 times, private –16.8 times). See ‘Russia in Numbers. 2007: Collection’. М., Rosstat, 2007, pp.130,131,138


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are accepted into college For exapmle, public and private colleges enrolled 1.1 million students in 2007, or 66.2% of total acceptance. Thus, by the number of college students per 10,000 citizens, we are steadily ahead of developed European nations (see Fig. 1).At the same time, quality performance (even if complicated to quantify) has decreased considerably, according to experts. College faculty complain about poor results in high school education. Some col-leges have even introduced remedial courses to fill the huge gaps among college freshmen, which slows their progress in college subjects. In turn, employers not only criticize the level of college train-ing (particularly technical graduates), they even have to drive to improve special retraining programs, sometimes spending tens of thousands of dollars for a new entry-level ‘specialist.’21 To the question ‘Shortage of which resources holds back economic growth?’ during 2008 sociology polls in Russia, the answer given by most Russian business owners was that the shortage was not that of capital, materi-als or even technologies, but it was the shortage of skills, and primarily competent economists and managers.As he spoke in a meeting (June 01, 2010) with activists of United Russia national political party, President Dmitry Medvedev said, ‘My greatest wish is that we focus on human resources (author’s emphasis - М.V.). Centralized human resource management is impossible from Moscow. Yes, we can appoint governors, we can also designate other key offi cers, but most activities take place elsewhere – in municipalities, in local governments’. The President maintains that capable, modern, thoughtful individuals must be available lo-cally to see modernization through.And here is the last assertion, before we continue to the image of a participant and provide recommenda-tions on human resource support to Russia’s modernization program. Modernization must become a na-tional strategy – only this can ensure mobilization and concentration of all national resources to address the issues of modernization. To synthesize Russian and foreign experience of national reforms let us restate key social premises that must exist nationally to ensure success of modernization: Existence of a modernization project (strategy) to ensure both mobilization of resources for accelerated development and material incentives to involve many (preferably most) citizens in implementation of the project.Agreement among the active part of the society to pursue the modernization strategy for a long period.Existence of a strategically-minded and socially responsible elite in the society22.

21From interview conducted by V.S. Lisin, Chairman of the Board, Novolipetsk Metallurgical Complex.

22А. Колганов. Три модернизации в России и наше время (А. Kolganov. Three Modernizations in Russia and Our Age). (Source: http://www.zlev.ru/69_64.htm)

Table 1. Investing in Innovation: Russia and Germany

Germany Russia

Percentage of GDP spending on innovation (2008 fi gure) 2.5 0.6

Investment in personnel as a percentage of total

innovation spending

38 0.6

Federal innovation programs Economic stimulus package I/II Russia 2020

Planned percentage of GDP innovation spending 10 2.5-3

Investments in personnel as a percentage of total

planned innovation spending

49 1.2


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2. Image/Model of a Modernization Program Participant23

In the broad sense of the word, human capital can be defi ned as ‘an array of personal creative abilities used appropriately in the life of both a single individual and the society as a whole’24. To activate this concept it is necessary to off er such a “Program participant model” that can be used to develop recom-mendations on how to shape a Program participant and phrase rules of conduct in the context of Russia’s modernization and innovation development, and principles of human resource involvement.The Program participant model consists of qualities that a person must possess in the context of modernization. They must have all occupational knowledge, abilities and skills on the one hand, and certain personal qualities and an inner drive on the other. Taken togther, this will help the Program participant to most effi ciently contrib-ute to innovation in the national socio-economic structure.Based on premises stated in the ‘13 Directions of the Tandem’25 and the ‘Russia-2020’ Concept with its empha-sis on the need to create competitive personnel potential and labor force, we can conclude that the social and economic development of the country requires well-trained specialists in priority spheres of development, and enough people capable to adapt to the new technological, production, economic and social reality. They have to think creatively, take unorthodox decisions and be unafraid to take chances26. Andrey Volkov, president of Skolkovo Moscow School of Management, in his interview to Novaya Gazeta daily stated that both the corpo-rate and the government sector lack people with leadership qualities: ‘If we really want to drive the moderniza-

23Material was prepared by Nataly Vendilo (Lomonosov MSU)

24 Экономика знаний / Отв. Ред. В.П.Колесов. (Economics of Knowledge) М.: Infra-M, 2008

25Five areas were identifi ed by the Presidential Committee for Modernization: energy effi ciency, nuclear technologies, computer software, space exploration, and medicine; eight were approved in 2006 by then-President Vladimir Putin: security and combating terrorism, living systems, nanosystem industry, telecommunication, armaments, wise use of natural resources, transport, and energy production (Vedomosti, June 16, 2010, p. 3)

26http://archive.russia-today.ru/2009/no_24/24_question.htm

Picture 1.


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tion forward, we need people that will take the lead, invent something new, take responsibility for their projects and realize them’27.The path of innovation development is a transition to intellectual labor to create something new that did not exist before. ‘Today, Russia is confronted with an objective unique in its history: to build a full-fl edged innova-tion class able to support the nation’s post-industrial development. The government needs to provide tools to enable the arriving generation to produce and implement ideas. Such tools can include TV shows, movies, even cartoons through which one can tell the kids that thinking and creating is a cool and trendy thing’.28 Besides education, people must be interested and involved in modernization, and this can happen if the following attitudes are shaped:• people must want to prove to the world that their nation is worth something,• unifi cation of the national elites must take place,• modernization must rest on our own strengths and confi dence in them,• promoting patriotism and national pride.For the above changes to take place in people’s minds, all the following questions are to be resolved fi rst, namely: what do people expect from modernization29:• equality of citizens before the law;• vigorous actions to fi ght corruption;• social justice.Irina Yarovaya, Government Patriotic Club coordinator and State Duma deputy, affi rms that we must begin with education, a system of moral and mental upbringing based on patriotic and conservative values.30 An education system must be built that can give knowledge and gumption needed to create an innovation economy. Not only college and university students need attention, but even children and infants, because they are the ones to continue with the burden of national modernization. Besides, we may not disregard that it is the family where kids are raised fi rst of all, and so it is really important to shape the spirit and de-sire for changes in the older generation.Moreover, it is necessary to focus on scientifi c research manpower in the country. Lack of government reg-ulation and support as regards science, research and educational workers can slow down the innovative element of the Russian Federation’s economic growth and failure to mobilize the scientifi c potential as key resource for steady economic growth.According to D. Livanov and M. Rogachev,31 two problems can be identifi ed in Russia that interfere with innovation development. On the one hand, it is the divorce of higher education from science in academic, industry, and the corporate world. And this is ineffi cient. on the other, it is the ineff ectiveness of science and its isolation from business.By mid-1970s, the USSR had more than 1.2 million scientists (a quarter of the total world number), with almost half of them employed by industrial R&D institutes. Today, with about 10% of global science man-power, Russia lags. It is in the top 40 of the high-tech market and its ratings keep falling. Our science that once addressed most complicated problems has now turned out to be ill-suited to the challenge of our time, the creation of an innovation economy.‘Innovative economic development assumes that innovative manpower can reproduce itself: occupational training in new technologies and techniques, economic and management, an increasing role for vocation-

27http://www.ng.ru/politics/2010-07-01/1_kadry.html

28http://www.vedomosti.ru/newspaper/article/2010/06/21/237988

29Analytical report prepared in cooperation with Friedrich Ebert Government Foundation in the RF, ‘Is Russian Society Ready for Modernization’

30http://www.ng.ru/politics/2010-07-01/1_kadry.html



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al education, preparing skilled workers with the capacity for innovation, i.e. able to create innovation inde-pendently as they work, to fi nd something new in other’s experiences, and adopt it for their own business. ‘An employee’s creative attitudes to their job functions as a source of corporate innovative development of manpower, which fi rst prompts “current innovations” (search for idle economic resources, improvements, labor management changes, and so on, not registered as intellectual property). Later on, they can lead to inventions and trigger large-scale innovation processes’32.

3. Required Competencies and Occupational Standards33

As we said above, modernization will require enough people able to rapidly adapt to the new technologi-cal, production-related, economic and social realities, quickly grasp perspective directions of progress in science and technology, changes on the domestic and global markets.The level of occupational education and skills of employees are a determinant of a capacity for innovation. The following competencies can be identifi ed as necessary for Program participants:— a capacity for logical thinking, ability to generalize, analyze and perceive information, to set goals and select ways to achieve them;— ability to analyze socially signifi cant problems and ongoing social processes, and to forecast their prob-able future evolution;— a capacity for self-development, self-improvement and advancement in skills and knowledge;— understanding the social value of a future occupation, high professional motivation;— ability to intellectually focus on the deliverables;— ability to coordinate information fl ows;— ability to collect, analyze and process data needed to address the objectives;— ability to select tools for best data processing to fi t the objective, to make calculations, analyze and ex-plain the results;— ability to build standard theory-based models of researched processes and phenomena, to analyze and meaningfully interpret the results;— ability to analyze and interpret domestic and foreign statistics on processes and phenomena, identify changing trends in performance;— ability to collect necessary data from domestic and foreign sources of information, to analyze them and prepare an information overview and/or analytical report;— ability to use up-to-date equipment, IT and application software to address analytical and research problems— ability to quickly assimilate large volumes of new information— being success-oriented and single-minded— ability to apply modern technologies.Many of the competences described above are being developed in colleges as envisaged by the new re-quirements put forth for college graduates. Under the modernization program, in view of the priorities for development described in Socioeconomic Development By 2020 as identifi ed by the Presidential Commit-tee for Modernization (energy effi ciency, nuclear technologies, computer software, exploration of space, healthcare), the following recommendations are being off ered:• Until 2015 (due to the low birthrates during 1990s), the number of students applying for college admis-

sion will continue falling, and many colleges will have to cut their faculty and programs. Therefore, focus

32Шпильберг С.А. «Кадровое обеспечение инновационных процессов в современной экономике» (S.A. Shpilberg ‘HR Support for Innovation Processes in Modern Economy’)



99

must be on colleges that train specialists for such industries as energy production, nuclear and space technologies, IT, and medicine). Such colleges must receive government support (more scholarships, post-graduation recruitment, advertising campaigns, etc.)

• Colleges should focus on practical training for manufacturing.• Search and incentives for talent (grants and scholarships, contests, business games, training sessions

jointly with production businesses, apprenticeships with production businesses, science research labora-tories, etc.)

• Search for talent in Western universities, creating the conditions to recruit young scientifi cally-minded talent.

An employee’s creative attitude to their job makes innovation development possible. It has to be re-membered that the competencies and personal characteristics needed for a program participant shape and evolve during their entire lives. According to practically all experts, to achieve good results in the specialist training needed for innovative socio-economic development, educational and awareness programs must begin as early as early childhood. This early age is when the basis of a person’s physical, mental and moral development is established. Failure to use the opportunities of this age cannot be fully remedied in later life.Competencies Shaped and Developed from the Ages of 4 to 734

At the age of 5 or 6, the level of independence and free conduct becomes manifest in those children whose ability and self-confi dence grow. Children more realistically evaluate their success in various activi-ties (drawing, playing, building, etc), and are strongly motivated. During the late pre-school years, the fol-lowing competencies evolve:• Social competence (the child begins to understand diff erences in attitudes of surrounding adults and peers,

and their own attitude to them, choosing the appropriate behavioral patterns)• Communicative competence (the child displays this competence in free conversation with peers and adults,

and expresses their feelings and intentions through verbal and non-verbal means (gestures, facial expres-sion, and speech infl ection).

• Intellectual competence (ability for practical and mental experimentation, generalization, fi nding cause-and-eff ect, planning speech).

• Creativity (the child’s ability to create a new image, design, structure that feature with originality, variation, fl exibility and agility).

• Willfulness (during late pre-school age, a child develops willful adjustment of behavior and is able to overcome immediate urges if they contradict the established standards or a promise , a major indicator of psychologi-cal readiness for schooling).

• Initiative shows in all of the child’s activities: communication, subject handling, plays, experiments, etc. Now the child can choose an activity he is interested in, join a discussion or propose what can be done. Initiative is connected to curiosity, eager mind, and inventiveness.

• Independence and responsibility.The above competencies evolve in kindergartens and in the family. The system of kindergartens is de-signed both to improve children’s socialization and to teach them the skills of dealing with their peers. On the one hand, kindergartens can be divided into:• municipal• departmental• private

34 http://magic-child.ru/uslugi/program/49-konceptualnye-osnovy-programmy-razvitiya-detei-4-5-let-


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• home-basedOn the one hand, kindergartens can be divided by specialty as follows:• General-development kindergartens with an area of emphasis, such as: physical, intellectual, artistic and

aesthetic education;• Child development centers – kindergartens for physical and mental development, remedying children’s

behavior and improving their health;• Combination-type kindergartens – this may combine general-education, compensation and health-im-

provement groups, in diff erent combinations);• Compensation-type kindergartens, with priority on skillful remedying of unhealthy patterns in the chil-

dren’s physical and mental development.Currently, there is a shortage of kindergartens. ‘According to Rostrud, starting from 1990, the network of kindergarten institutions has reduced by 40%. This is most visible in rural areas: the number dropped from 56.1% in 1990 to 37.9% in 2001. In the cities, kindergartens have decreased from 70.5% to 65.7%.’35

To ensure more effi cient socialization of the child and instill the above competencies, we need to in-1. crease the number of kindergartens (based on the growing birthrates), and to:Have more kindergartens of with diff erent forms of specialization;2. Improve the skills of kindergartens staff who have direct contacting with children (teachers)3. Focus on and develop the following qualities when working with kids:4.

a. Leadership ability b. Ability to adapt to change c. Ability to think creatively, take non-standard decisions, and ask questions d. Self-confi denceAlso, patriotism and national pride must be cultivated at this age.5. Create as many sports clubs as necessary for kindergarten kids to practice sports.6. Create TV shows, cartoons and fi lms for children to explain the importance of self-confi dence, creative

and unorthodox thinking, promote patriotism and national pride.7. Because competencies in kindergarten children cannot be shaped only by kindergartens without involv-

ing the parents, we need to ensure close cooperation between kindergarten teachers and the parents.

Competencies of Elementary to High School StudentsThe central link of education is the general-education school: it shapes the integral system of universal knowledge, skills, and experience for student’s independent action and responsibility.The following groups of competences are identifi ed that evolve in the child during the elementary to high school education period:Value semantics. These are competences related to the child’s value system, their ability to see, under-stand and navigate the world around them, understand their role and purpose in it, select value and sig-nifi cance for actions and behavior, and make decisions. This determines the child’s individual education trajectory and life program as a whole.General cultural. Learning and experiences in culture of a specifi c people and humanity as a whole; spiritual and moral base of the individual human and humanity; the role of science and religion in human life, etc.Educational and cognitive. This set of the child’s competences in the fi eld of independent and cognitive activities, including elements of logical, methodological, and general learning activities. This covers meth-ods to organize objective setting, planning, analysis, refl ection, and self-assessment. The child learns to

35http://www.regnum.ru/news/1144443.html


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gather knowledge directly from the environment using methods to solve educational and cognitive prob-lems, and act in nonstandard situations.Information. Active skills to work with school subjects, fi elds of knowledge, and the environment; know-ing how to use processing equipment and IT technologies.Communicative. Knowing languages and ways to interact with surroundings and remote events and peo-ple; teamwork skills, ability to assume various social roles.Social work. Performing the functions of a citizen, witness, voter, representative, consumer, client, and family member.Personal self-improvement competences help to master ways of physical, spiritual and intellectual self-de-velopment, emotional self-regulation and self-support. The student learns ways to act based on their own interests and abilities, which translates through continuous learning about self, evolving personal qualities required for a modern person, acquiring psychological knowledge, culture of thinking and behavior.36

The period between the elementary to high school is the time to build the foundation for occupational training. The main goal of occupational training is to produce a skilled worker of the requisite level and specialty. This person is competitive on the labor market, competent, responsible, with good command of his occupation, can easily navigate in related fi elds of activities, is able to work at a world-standard level, is prepared for continued professional development, is socially and professionally mobile; and responds to the need for a good education.The occupational competences shaped at the time of high school or college education depend on the chosen direction for specialization.To develop an innovation economy, we need not only specialists in the sphere of science, although this is one of the most important vectors to train production related manpower; we also need to prepare mana-gerial workers able to organize a creative atmosphere and team spirit, to motivate employees for search and innovations.

The following recommendations are proposed:• Creating specialized schools or classes (such as chemistry, physics and mathematics)• Talent searches and incentives• Providing conditions for creative science, engineering and research: competitions, contests, inventors

fairs; new lab equipment in chemical and physics classrooms, and fi eld study sessions• New equipment for schools• Continuous retraining for teachers • Awareness campaigns to build the value system of students• Getting students involved in social practice to build the required value system

• Variety of leisure activities for school students: Equipment for sports clubs Clubs and groups were children can use their creative skills and talents Art and performance competitions Expanding the horizons: business to museums, theaters, tours, etc.Creating the required number of schools that off er primary and intermediate occupational education. By specialization, such schools must conform to the ’13 Related Areas’. In addition, a recruitment system must be available to employ graduates of vocational schools and colleges.

36www.it-n.ru/attachment.aspx?id=20031


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4.Estimated Need for New Manpower37

While Russia has offi cially over 2 million unemployed, it also has a shortage of manpower. For example, Ankor recruitment holding company and the Russian government’s employment agencies researched the problems of 14 mono-cities in seven Russian regions in May 2010. This includes the cities of Zavolzhye, Pavlovo and Kstovo in Nizhny Novgorod Oblast. Top managers of the cities’ main employers were asked questions about human resource problems, and the poll covered three to fi ve companies in each city. The poll showed that despite the crisis, the mono-cities of Nizhny Novgorod Oblast had manpower short-ages in industrial farming (8% of jobs unfi lled), machine building (4%), retailing (18%), transportation and logistics (4%). In their press release, Ankor Company experts stated that small cities have few specialized schools to train required workforce in demand on the market, and where such schools exist, their training is of questionable quality, said Vladimir Yakuba, senior partner in Tom Hunt recruiting company38.At the same time, there is a shortage of researchers in science. According to the Strategy for Development of Science and Innovations in the Russian Federation, science research and education organizations, large enough and fi nancially stable, possessing world-level equipment and employing skilled manpower, will form the backbone of the national sector for science and higher education in future until 2015.The 21st Century will be the age of an economy where one of the main resources is the manpower poten-tial for science, education and high-end production. However, between 1990 and 2005, total number of personnel used for research and development in Russia decreased by 58 percent. In absolute numbers, our science lost over a million workers.Reduction of R&D manpower occurred due to the intensive migration of research workers and auxiliary personnel to other sectors of the economy and employment in Russia (‘internal migration’), emigration of scientists (‘brain drain’), and loss of senior generation scientists to natural causes.According to research, the dramatic drop in numbers of personnel used in the R&D sector occurred in 1992-1998 , and during 1992-1994 the number of science research manpower plunged by 40% compared to the 1991 level.In 1995-1998, many scientists attempted to adapt to the new environment. The scope of latent ‘internal migration’ of manpower increased. Not only migration to other walks of life, but sometimes a part-time job that takes many working hours inevitably results in partial or complete loss of the scientist’s research skills. Starting from 2002, against the background of science manpower outfl ow, the share of young scientists (aged under 29) grew slightly, while the number of researchers in the middle age group (age groups 30-39 and 40-49) decreased considerably. Ten years from now, this situation may trigger a disaster, because these processes will be aggravated by another – quite deep – demographic crisis.At present, a variety of measures are used on the federal and regional levels to support young scientists, and students of all age groups. Programs are implemented to help young talented people to get involved in science research and development, to support student creativity in science and engineering. There are also programs under which businesses off er grants to support young and talented scientists and specialists.

5. Demographic Environment and Labor Market in Today’s Russia 39

By 2020, the inertia of depopulation as the trend that emerged during the 1990s and early 2000s, may reduce Russia’s total population to 140 million (with 142.1 million in 2007), while the employable popula-tion may plunge to 77.8 million (from 89.9 million in 2007). Under such conditions, Russian population may



39Material was prepared by Nataly Vendilo and Vadim Marshev


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shrink to 137 million by 2030, thus creating a threat to national security and integrity, particularly due to the sparsely populated far eastern regions.40

The Prime Minister’s press secretary Dmitry Peskov said that the demographic collapse of that period will result in the near future in a shortage of students. Compared to 7 million admitted to colleges this year, the number will be 4.5 million in 2015, according to the Ministry of Education and Science41.Starting from 2009, the age structure of our population will deteriorate remarkably due to the active repro-ductive age of the few citizens born during late 1980s to fi rst half of 1990s. The structure of the employable population will show an increase in the older employable groups (45+), while the share of young citizens (up to 29) will shrink. Consequently, by 2020, the demographic load on the employable population will in-crease considerably. Compared to 580 citizens not of working age per 1,000 of employable age, there will be 837 in 2020.Should the depopulation trend persist, population density will inevitably drop to a level at least three times less than the global average.These negative trends can be reversed by the following activities:• an active national demographic policy measures to support motherhood (as envisaged by the Russian Federal Demographic Policy Con-

cept for the period until 2025) more active infl ow of migrantsPossible scale of annual migration growth rates are estimated as 304,000 persons in 2010 to 689,000 per-sons in 2025. Such annual migration balance cannot fully compensate natural decrease in Russian popula-tion• lifestyle of a Russian family raising the value of childbirth and upbringing along with growing welfare and changing social be-

havior patterns.The falling population possibly can be compensated with the maximum use of all available demographic reserves through maximized employment rates of women and disabled citizens as well as reduced death rates in the employable age groups. For example, should our employable death rate be reduced to the lev-el of EU member states, according to the World Bank estimates this could add 3% to Russia's employable resources by 2020. Higher employment rates of the disabled to at least a medium level, according to OECD estimates, by 2020 would increase the nation’s economically active population by 3.6 million, or 5.5%42.If the depopulation trend continues, population density will inevitably fall to a level at least three times be-low the average world level.These negative trends can be reversed through the following activities:• an active demographic policy of the government Measures to support motherhood (as envisaged by the Russian Federal Concept of Demographic

Policy until 2025) more active in fl ow of migrantsPossible scale of annual migration growth rates are estimated as 304,000 persons in 2010 to 689,000 per-sons in 2025. Such annual migration balance cannot fully compensate for a natural decrease in Russian population

40‘The Main parameters for Socio-Economic Development Forecast for Russian Federation until 2020–2030. Appendix to Concept of Long-Term Socio-Economic Development Forecast for Russian Federation’

41Максим Товкайло «Некого учить» (Maksim Tovkaylo ‘No Students to Teach’), Vedomosti, No. 106 (2624) June 11, 2010

42The ‘Main Parameters of Socioeconomic Development Forecast for Russian Federation for 2020 – 2030. Supplement to a Long-Term Socioeconomic Development Concept for Russian Federation‘


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• lifestyle of a Russian family raising the value of childbirth and upbringing along with growing welfare and changing social be-

havior patterns.The falling population possibly can be compensated with the maximum use of all available demographic reserves by maximizing employment rates of women and disabled citizens, as well as reduced death rates in the age groups of working age. For example, should the death rate among those of working age be reduced to the level of EU member states, according to the World Bank estimates this could add 3% to Rus-sia’s labor resources by 2020. Higher employment rates of the disabled to at least medium level, according to OECD estimates, by 2020 would increase the nation’s economically active population by 3.6 million, or 5.5%.In addition, it can also be noted that fewer college students can leave some 100,000 college faculty with-out employment between 2011 and 201543.According to the RF Federal State Statistics Service,44 three forecast scenarios exist for Russia's population dy-namics: low, medium and high scenarios. All three consider the migration component in the changing Russian population.Positive population growth rates (from 2010) are available only in the high estimate where Russia's population is to grow by 4.8 million in 20 years. Both the medium and low scenarios expect a population decrease: under the low forecast, our nation’s population will drop by over 14 million persons during the next 20 years; and under the medium scenario, Russia is to lose 3 million people in the 20 years to come. The trends are shown in picture 2 below. Regardless of the forecasts, a decisive factor determining the future direction of population dynamics is population growth through migration as illustrated by the data represented in picture 3. Thus, it can be doubtlessly concluded that social tensions in Russian will keep growing inevitably, particularly if we con-

43Максим Товкайло «Некого учить» (Maksim Tovkaylo ‘No Students to Teach’), Vedomosti, No. 106 (2624) June 11, 2010

44http://www.gks.ru/wps/portal/OSI_N/DEM#

Picture 2. Russian population change estimates


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sider the nature of migration that has turned into an uncontrollable process during the recent decades.Picture 3. Annual changes in Russian populationAccording to demographers, population migrations are one of the major factors in the evolution of Russia’s human potential, particularly during the transition to an innovation economy. From the point of view of global development, migration acts as the engine of progress in science and technology and a develop-ment factor for humanity as a whole. Indeed, migration can have both positive and negative consequences related to brain drains. In the conditions on economic globalization, an increasingly common viewpoint is that ‘the spirit of our age is best represented by a nomad – a person traveling from land to land’, and that in the future society ‘all people will keep migrating regardless their culture’, it also that ‘the major integration factor that has existed since the beginning of humanity and enabled people to overcome various diff eren-tiation processes was their constant penchant for migration’45.Among the migrating millions (over one billion people annually during the 2000s), a special place belongs to migration of scientists, postgraduates, engineers and doctors, teachers and students, and other highly skilled specialists. The share of intellectual migration keeps growing in total migration fl ows and according to estimates has now exceeded 30%. As the former UN General Secretary said in his report on international migration and development, the share of highly skilled immigrants during 2000s was much more marked as compared to 1990s, and this ‘refl ects the growing trend… that host countries increasingly use their per-manent immigration programs as a vehicle to attract highly skilled migrants’46.On the whole, intellectual migration is a positive phenomenon. The entire development history of the global civilization is also history of continuous migration of talents who carried advanced science knowl-edge through national borders. It has to be emphasized that from the late 19th century Russia has played

45From В.А. Ионцев. Миграция населения и человеческий потенциал (V.A. Iontsev, Population Migration and Human Potential). М., TEIS, 2009. Chap. 7.2, p.139

46Global Population Monitoring for International Migration and Development. UN General Secretary’s Report. Committee for Population and Development. Session 39. April 3-7, 2006. NYC :UN, 2006, p. 9

Picture 3. Annual changes in Russian population


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a signifi cant role in global intellectual migration, both quantitatively and qualitatively. Suffi ce it to say that every year hundreds of thousands migrate from and into Russia, and these people represent the intellec-tual layer of the modern society.Meanwhile, a thesis has become widespread recently emphasizing negative consequences of intellectual migration for source countries, related to the wrong approach that equates it with brain drain. Indeed, brain drain is a highly adverse phenomenon for source countries, but this term does not encompass all in-tellectual migration. The main diff erence of the latter is its reversible and temporary nature. And speaking of brain drain, this is essentially an irreversible migration of highly skilled specialists (at both high and me-dium levels), who are seen by their host countries as targets for purposeful emigration policy to lure them (economic factors as the prime motivation).The problem is of special relevance today when national modernization and building of an innovative economy are the issue in question. An issue of special concern (along with leaving thought generators and founders of science schools) is that young talented people are leaving. Their failure to join the work sphere cripples the development of science and manufacturing, and in fact all other activities. According to the RF Federal State Statistics Service, Russian specialists mainly leave for the countries of Western Europe (42.4%) and North America (30.4%). Speaking of regional particularities as regards migration from Russia, most mi-gration occurs from areas that possess strong high-end manufacturing with science and engineering poten-tial. For example, just Moscow, St. Petersburg, and their respective regions account for 75% of total outfl ow of scientists, other notable sources being the regions of Novosibirsk, Sverdlovsk, Irkutsk, and Tatarstan.During the recent decades, developed nations (US, Germany, France, etc.) pursue active immigration poli-cies to lure ‘Russian brains’, with special legislation adopted to encourage the infl ow of Russian scientists. Purposefully robbed of its valuable ‘human capital’, Russia is doomed to economic backwardness. And is it possible at all to measure ‘human capital’ in monetary terms? Can we economically evaluate the nation’s intellectual and spiritual treasures if its loss may trigger degradation and self-destruction?47 Should the trends of demographic crisis and brain drain continue into future, issues may arise that can hardly be resolved. Who is there to revive our science and production, when high-end technologies determine their future but 46% of Russian scientists are in their 50s? Who is there to replace the already aged and still aging faculty in Russian primary, secondary and higher schools, when reinforcements are inadequate, and we run against time to restore our ‘human potential’, and may soon run out of time, in view of the extremely rapid changes in science and engineering? The issues of overcoming the demographic crisis and its consequences can only be resolved by the government’s comprehensive approach to demographic process management: incentives for birthrate growth, reducing the death rates, and boosting internal migration ability. As regards action to counter the brain drain, a comprehensive government immigration policy must be worked out to include measures to regain the exported Russian talent and import skilled immigrants from elsewhere.The number of working age people in Russia has been reducing steadily:fi rst, due to increasingly fewer people joining the workforce every year,second, due to retirement of a great many citizens born during the high birthrate years, third, due to retirement of numerous employed pensioners. 48

The trend persists. Moreover, Konstantin Poltoranin, head of the Federal Migration Service’s press depart-ment, says that skilled migrants account for 5% or less of total employable immigration. ‘Expats from non-FSU countries mainly come to Russia for short-term projects’, Poltoranin explains. Forced by the crisis, com-panies have curtailed most of their investment projects and cut their budgets.

47As Blaise Pascal wrote in 17th Century, ‘Let 300 intellectuals leave, and France will turn into a nation of idiots’

48http://www.osvic.ru/job-career/labour-market-31/article12127.html


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Labor migration markets are competitive markets, and Russia loses again. ‘Skilled foreign specialists tend to fi nd employment in the European nations, the US or Turkey rather than Russia’, the expert says.The root of the situation is that Russia has no smart and distinct pattern to attract specialists. We do not have any partnerships with foreign schools, and foreign students coming to Russia are hardly entitled to any grants. In addition, a foreigner daring to come here will need to go through long and hard times to adapt to life in a large, strange and highly bureaucratized nation.Besides, according to the Federal Migration Service (FMS), the number of Russian citizens who leave the country for employment has also dropped with the crisis, and considerably – by nearly 50%. ‘If 83,188 per-sons left in 2007 according to offi cial statistics, only 42,416 or merely half of that left in 2008’, reports Trud daily referring to the FMS press service.In the long term, the labor market will be shaped under the impact of ever-growing manpower shortages due to shrinking employable population and unbalanced labor supply-demand both by occupations and geographically.Labor market development49

A fl exible and effi cient labor market is a major component of innovative economy. At the same time, a modern economy cannot grow without productive employment which comes from an effi cient fl exible labor market that ensures rapid response to economic challenges.A transition to an innovative economy (restructuring and diversifying industries) will change the estab-lished employment structure, going hand in hand with cutting ineffi cient jobs, the redistribution of the workforce over various sectors of economy, expanding the service sector, the growth of innovative activi-ties, and emerging new employment areas. In such conditions, the labor market will stimulate the creation of new effi cient jobs, including fl exible forms of employment with higher turnover rates.Global economic processes are going to embitter competition on the skilled labor market. The negative demographic trends now observed in the Western European nations will create more demand there for workforce from the CIS member states, including the Russian Federation.Competition between the economic leaders on the international labor market will be of high importance in terms of integration of Russian economy into the global business. Such competition will result in higher requirements on the part of employees (salaries, perks and guarantees, safe working conditions, etc.) in rela-tion to jobs inside Russia, and will aggravate the problem of the reduced total labor supply on the market.In the long term, the problem will be worsened by a reduced total labor supply on the market due to fewer employable citizens (over 10% during 2007-2020). However, with adequate growth rates of production output after the transition to an innovation economy, this need not become a restraining factor. As an additional source to compensate for reduced labor supply on the market (by 6.7% annually during 2011-2015, and by 7.5% in 2016-2020), people’s employment mobility will grow. This will also helped by an infl ux of foreigners, which the economy may require.

6. Peculiarities of the Human Resource Strategy Program50

Regional Peculiarities of the Human Resource. The region where the human resources strategy is imple-mented is directly related to the methods, principles, objects and subjects of the program implemented there. The regional factor applies to both the concentration and specialization of industries. By extension, the regional factor impacts both HR peculiarities and existence of/access to subjects of the implemented program.

49Concept for Long-Term Socio-Economic Development of Russian Federation until 2020

50Material was prepared by Michael Vasiliev (Lomonosov MSU)


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The program essentially places the focus on development of primarily the regions and periphery since they are the areas which need modernization most. Yet the specifi cs of the process means that the more remote from large cities and regional centers, the lower concentration of all types of infrastructure, par-ticularly that of education that was destroyed with greatest intensity during the recent decades.Absence of teachers as subjects of the Program’s implementation will become a harsh problem in nearly all areas beyond large cities or local centers. Although some areas can do with merely recruiting, training or retraining the existing teachers and trainers, most regions will be confronted with the need to train their teachers from scratch.In addition, depending on the region, the motivation of employees ready to join the process of moderni-zation will also vary. Here, the trend described above is true. Namely that the further from a local center, the worse the situation with motivation and readiness to change. All active human resources prepared to change have now left for cities and are more or less settled. So in some cases that are the rule rather than exception, implementation will be confronted with the problem that people must be rescued before modernization can even begin, and they need to be raised to a level adequate for modernization. In such areas, modernization is unthinkable as long as we do not get rid of such basic problems as upbringing for kids (with even kindergartens out of reach quite often), alcohol abuse by parents, or no social welfare infra-structure existing whatsoever.As we can read in par. 15.4 of the Program, the region of implementation is going to impose some ethnic HR diff erences. The key to the process is the ever-growing advent of migrants from year to year who re-place local and native groups in Russia. If issues of ethnic confl icts must be addressed in some regions (as we can well see even now in most regions with high migrant presence), in some areas the program will run into the trivial incompetence in the Russian language and general close-community attitudes of illegal migrant groups. Besides, ‘modernization’ of illegal migrants is a open question, although they account for a sizable share of employment in entire industries.Another important issue that, unless resolved, can compromise the very idea of national modernization of the whole country rather than its individual parts, is the corruption component. At this time, corruption grows in proportion to the distance to a large city or local center – particularly in education. This process is well illus-trated by such an indicator as the Unifi ed State Examinations were the trend once shown quite obviously as ‘the further from Moscow, the better the results’. This situation exists even though the USE system, when in-troduced, assumed maximum anonymity, protection and comparability of results. The authors of the Strategy fear that the process of modernization in the periphery can smoothly evolve to sales of documents confi rming ‘accomplishment’ of modernization. In addition, another problem exists that can jeopardize the process of modernization locally: the absence of local educational institutions, from a lack of secondary schools to a lack of access to a local college education. This circumstance strengthens internal migration fl ows and increases the infl ux of migrants from the periphery who eventually settle down where they were schooled.At the time when implementation of the strategy begins, all regions start from diff erent positions and have at least diff erent chances of success. Therefore, to launch implementation in the regions, we have to ad-dress the following tasks:

Divide the territory of the Russian Federation into more or less uniform areas – zones.1. Create a coordination center for strategic implementation. Besides its coordinating function, the center 2. is to furnish all necessary information and programs that local centers need to implement the strategy. In addition, the center’s function will be to organize lifelong education with no restriction by age or otherwise. To realize the ideology of lifelong education locally, a nationwide network is proposed that would unite all centers, including those of zones, involved in the process of workforce training and education.


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Establish zone centers to coordinate strategic implementation and teach trainers and coaches. Their 3. function is to coordinate and organize strategic implementation in their respective regions, and to supply faculty to support the process of education. Besides, zone centers will adapt to the strategy the specifi cs of the regional environment.Create a system to monitor strategic implementation, using both existing control agencies and struc-4. tures and newly created control systems.Research interdependence between the new strategy for manpower modernization and the existing 5. law that regulates education and training, anticorruption laws, migration laws, etc., to accordingly modify the applicable legislation and the Strategy. Interaction of the strategy with the ‘HR – National Professional Workforce’ project must be organized to ensure supply of professionals to implement the Strategy.Amend existing legislation for better responsibility (including criminal liability) of the subjects of mod-6. ernization.Ensure equal and equitable access to the market locally, and remove existing obstacles of red tape and 7. corruption in Russia’s regions.

Industrial Specifi cs of the Human Resource. Along with the respected region, the prevailing industry will also vary, which in turn will have an impact on the forms and methods of the program’s implementation. From the standpoint of the industrial sector aspect, we can identify the following key problems to confront the modernization process:

Job creation.1. Supply of adequate workforce for existing and newly created jobs.2. Supply of stable jobs for ‘non-modernized’ employable population.3. Ensuring a stable demand for products of strategic industries in the making.4. Building inter-industry product supply chains independent of imports.5.

It is obvious now that regardless the industry, a key role in addressing the fi rst problem will belong to medium and small businesses, and private enterprise generally as an institution.Both local and federal governments delegate the job creation function to small business51. The cornerstone of the assumption is refl ected in the HR strategy for small business, now known as downsizing. In brief, both in Russia and all over the world, small business seeks to minimize the number of its full-time employ-ees. There seem to exist two ways out of the situation.First, we may take the path to increase the number of small businesses. Second, we can create incentives for small businesses to hire more employees. Regardless of the scenario – and the combination of the two seems to be a more viable option – its implementation depends on correctly built package of practicable privileges for small business. It is not quite clear at this time how medium and small businesses can create new jobs in the environment of growing tax loads, no access to loans, strengthening competition was im-ported goods (even if of poor quality), and perplexingly intricate tax law. It is doubtless however that un-less serious support is provided by government, businesses can hardly deliver on their own. The Skolkovo experience that created innovative zones with tax benefi ts must be extended nationwide to all small busi-nesses. Only this can make small business actually benefi cial economic zone in all respects, and only then it can be regarded as an important subject of modernization.Generally, even today we see inadequate supply of human resources in virtually all industries, with a pal-pable unemployment level at the same time. For example, the sports industry has 59% of the required

51http://www.businessjunior.ru/NewsAM/NewsAMShow.asp?ID=8875


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human resources52, while the fi gure for agriculture is 30%; oil production fares even worse, with 50 unfi lled jobs for each skilled specialist53. Meanwhile, the manpower shortage in one industry occurs along with oversupply in others: we all know that colleges steadily produce large numbers of economists, lawyers and accountants. Such a situation is mainly caused by the existing structure of education and the society’s value system. Today, students prefer humanities and general-purpose professions, while few are tempted by the the career of an industrial worker. The existing system of education in fact works to satisfy the de-mand in such training and must be readjusted to redistribute the priorities and entry gates. Adoption of the Unifi ed State Examinations destroyed all barriers to college and devastated the colleges themselves. If we rethink the USE system in such a way that only highly gifted students can enter universities while the main fl ow of students is redirected to technical colleges, we would seriously improve the current situation with manpower for individual industries.As mentioned above, schools themselves must also be modernized through an organized system for real and tuition-free retraining of faculty, to exchange experience with their foreign colleagues.Five-fold reduction in the number of Russia’s strategically important companies54, in conformity with the Presidential decree of June 18, 2010, and the federal government’s decision to discontinue sponsorship and patronage of obsolete and irrelevant industries is going to further aggravate the issue of jobs for the employable population. The problem will impact ‘modernized’ citizens too: the issue of modernized jobs for modernized personnel will become critical. Sad as it is, the problem is inherent in the nature of mod-ernization. Higher labor effi ciency (where Russia is 3 or 4 times behind more developed nations)55, and higher outputs that the government intends to raise in the same proportion56 will result in at least on par job cuts57, with unemployment rocketing. To prevent a social collapse, new jobs have to be created.However, small business needs an ‘engine’ to drive Russian economy. In many nations, such economic en-gines are the defense industry, machine building and mining. Regardless the economic backbone industry, key development factors include government support, government contracts, and occasionally govern-ment management of the strategic industry. An important condition to build the economy around a single industry or array of industrial sectors is a high enough degree of the industry’s openness for domestic small businesses, and keeping low entry barriers to enter and work in the industry. The lucky companies that join the list of national strategic businesses must receive real institutional support for their activities, not limited to fi nancing alone, but including a custom-made system to supply human resources, sales op-portunities, equipment, and up-to-date technologies.The above clearly suggests the most important decision that is the cornerstone of the entire program: modernization is unthinkable without the government’s purposeful, systemic and orderly eff orts to de-velop specifi c industries in any specifi c region. The Russian government has made a good example of such work when it embarked on the Skolkovo project. Yet, the main industry-based diff erence of the Program will be that Skolkovos have to be created literally everywhere, in each industry, each region, in order to a) provide modernized employees with jobs; b) create a mechanism for further continuous HR modernization in Russia – in fact, self-upgrading; c) build a new pillar for Russian economy.The problem of supplying domestically manufactured components, technologies and materials for pro-duction cannot be resolved without the government’s systemic policy in the fi eld. Indeed, this is a matter

52http://gorodlip.ru/events/e10130110/

53http://www.novopol.ru/-neftyanaya-otrasl-ispyityivaet-kadrovyiy-golod-text55525.html

54http://chelovekizakon.ru/novosti/20100618/medvedev-podpisal-ukaz-o-sokrashhenii-strategicheskix-predpriyatij-v-5-raz-4574

55http://dm-b.livejournal.com/66038.html

56http://www.rg.ru/2008/02/26/a210835.html

57http://www.gpclub.ru/news/6125.html


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of national economic security. If competently solved, this issue will help address one of the above obsta-cles on the way to modernization: ensuring stable demand for the national product. This problem cannot be removed with protection barriers – ineffi ciency of the approach in the B2C sector was proved with time and practice. For example, the automotive industry in Russia, though expected to realize its unique competitive edge on the future market, now regards the barriers proper as its own competitive advantage. Therefore, fi rst and foremost, domestic demand must be secured for the domestic manufacturer, and this appears to be easier in the B2B sector.Thus, from the standpoint of industry-based specifi cs of manpower modernization, the following range of relevant activities can be identifi ed:

Build a nationwide compulsory system of government contract-based manpower training, with the 1. purpose to supply industries with workforce grown for a specifi c purpose from their infancy.Create truly benefi cial conditions for operation of medium and small business, in terms of both tax leg-2. islation and government support and aid in each specifi c issue.Create conditions under which it would pay small businesses to hire more people.3. Develop an employment program for citizens whose training, age, etc. prevent their full integration in 4. Russia's new economy.Create a united industry-based coordination agency with functions, among other things, to coordinate 5. and arrange exchange of technologies and results of innovative activities between domestic business-es and industries, prepare government contracts to train specialists, interact with educational institu-tions, etc.Develop a series of measures for immediate modernization of national law, based on the requirements 6. of modernization and innovation processes in Russia.Precise tuning of national education system, to produce more specialists with vocational education 7. (including college level).Develop and implement a series of measures to raise the prestige of low status occupations and trades.8. Organize interaction between departments and industries to ensure smooth communication in the 9. Russian manufacturing community.

Specifi cs of Public Employee Training. As mentioned above, the very role of public employees on all levels is to be modernized in the modernized Russia, regardless of their infl uence and involvement in the modernization process. Two problems exist that generate a whole range of lower-level problems: on is in-adequate skills – or incompetence to put it bluntly – of public offi cers in the medium and lower echelons; the other is corruption. According to the authors of the Strategy, one of the key principles of strategic implementation must be the one that persons placed in charge of human resource modernization both locally and centrally may not be people with experience serving in public offi ce. This disagreeable conclu-sion and unpopular decision were caused directly by low outputs of all eff orts to raise the public sector’s effi ciency during the recent years. The main problem that cannot be resolved without total change of hu-man resources is corruption. This is a disease that requires systemic and radical treatment.In addition, a serious shortage of public offi cer training programs exists nationwide. If the situation is not so poor in Moscow (where besides the Russian Academy of Public Administration, a whole range of schools exists to train public offi cers, including Moscow State University), Russia’s regions have almost no such institutes and programs. As a consequence, public offi ces are occupied by unprepared specialists (in terms of both morality and vocation). The problem unfortunately needs no series opposition in this coun-try. According to these writers, government management is a particular domain of managerial activities for which would-be offi cials must be prepared even before they are born. This statement is not an exaggera-tion, since it is practically impossible to overcome corruption in a single generation. Thus, the fi rst priority


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is to prepare methodological support for training of public offi cials of every rank and level. Generally, the following objectives can be identifi ed as regards training of public offi cials:

Preparation and enforcement of a rigorous anticorruption policy. In fact, we speak of a new 1. repressive campaign against public feeds. In 1930s, nobody could pay to escape government repressions and sanctions, and this is the experience of that age that we need to adopt now.Develop new programs to train public offi cials, and institutes to implement them.2. Create serious barriers on entry to public offi cials to select specialists of true skills and merits.3. Remote all exit barriers from public offi cials to prevent immunity of public servants.4. Build a system of government contracts to train public offi cials. Today, our situation is the same as in 5. 1961, when the best among the best were trained and selected for space exploration. Our modern system of training for public offi cers must rest on the same principles as the system that trained cos-monauts.

Particularities of Business Management Training. The principle described above under which the Skolkovo project is to be implemented nationwide primarily applies to the training of professional manag-ers who are able to control both the modernization process, and the already modernized economy as a whole and its industries and businesses in particular. In addition, the objective of training business people is closely related to the objective to increase the number of small businesses in Russia. A business owner is primarily practically minded, not being a theorist; therefore, the most important task for preparation of future business owners is to create training programs for practical purposes. Since this task is impossible to achieve through any of the existing educational formats, we propose:

Creating all conditions and developing the network for lifelong education institutions.1. Providing a regulatory and legal basis to adopt the practical component in the process of multilevel 2. education.Creating conditions for real apprenticeship in real companies as an integral part of the training process.3. Creating a business training center in Russia, the function of which is to coordinate such educational 4. activities nationwide. The center must also organize exchange of knowledge, information, technolo-gies etc. between businesses and education institutions. Develop a system and standards to prepare business trainers at diff erent levels.5.

Particularities of Engineering Manpower Training. At this time, except for production manpower, it is diffi cult to fi nd any HR area in Russia where the issue of supply would be as acute as with engineering manpower. The 1990s began, among other things, with a slogan that the nation no longer needed as many chicken-feed engineers as it had. 20 years ago. We are left with not a single engineer who would not shame his nation internationally. This is a serious systemic problem with the training of professional engineering human resources. And as long as it is not resolved, it is impossible to have any progress with modernization and an innovation economy. Our problems with ballistic missiles will exist until we resolve the problem of quality training of engineers. Therefore, we need to:

Develop at the federal government level a program and ideology of Russian training to produce engi-1. neering specialists, and rebuild the system for it.Develop a series of measures to promote engineering education.2. Ensure the existence of a single information space in the fi eld of engineer training, for self-reproduc-3. tion and ongoing improvement of the system to train engineering specialists.Introduce specialization to prepare students for such programs at all existing levels of education, in-4. cluding for infants.Develop new educational standards to cover 15 years of special training for engineering manpower.5. Develop a quality control system to assess practical results of trained manpower.6.


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Particularities of Production Manpower Training. Among all current manpower-related diffi culties in Russia, there is none as severe and neglected as the workforce supply for manufacturing. The problem was already mentioned above in par. 15.7. It can be said that in recent decades the problem was mitigated by an infl ux of cheap and low-skilled workforce from the neighboring countries. Traditional methods of edu-cation and training alone are unable to resolve it at this time because it has its roots in the social environ-ment. Thus, to correct the situation and provide production manpower for the nation, we need to:Develop and implement a new system for production manpower training based on continuity and easy access.Change the culture and nationwide perception of the industrial trades as less prestigious and develop a series of measures to promote production-related occupations.Limit the infl ux of foreign workers after the market becomes truly competitive.Develop programs to develop rural areas and resettle the Russian North and Far East, also achieving or making progress to achieve objectives to develop business enterprise in Russia and raise the prestige of individual trades and professions, etc...

7. General Conclusions and Recommendations on Human Resource Support for Program ImplementationThis Section contains conclusions and recommendations on human resource support to implement the Program for productive force reorganization, modernization and transition to innovative national develop-ment. Part of the assertions repeats some of the statements above; others generalize the entire material of this Chapter.1. Generally, the material of Chapter 15 mainly represents the educational component of the human resources system for the Program; as said elsewhere, this component is of key importance in the system of ‘human potential for national modernization’, and is in turn a complex system the evolution of which is predetermined by numerous causes and factors, with an array of functions realized in the society. Today, the connection between modern high-quality education and the perspective to build a civil society, a secure state and effi cient innovative economy – this link is obvious. The aforementioned importance and complexity of the ‘education’ component is supported by the fact that it is recognized and institutionalized, fi rst as ‘an economic activity’ (according to the ‘All-Russia Classifi er of Economic Activities’), and second, as an ‘economic industry’ that has educational institutions as its own components, complete with all material and spiritual assets58. 2. The objectives and functions of the educational fi eld discussed above are designed to operate and develop factors which, fi rstly, determine the level, growth and development of productive labor by productive forces, through which man’s attitude to nature is manifest. These factors operate as the basis for productive labor dynamics because they immediately shape the productive force of labor as the possibility of labor’s output. And secondly, the same factors (if purposefully controlled) ensure development of productive forces and, consequently, work to achieve objectives to reconstruct and transform the nation’s productive forces. The translation of a potential labor output (as a possibility, through education) to real life depends on the social environment, economic system, its component production-related and institutional relations, on the effi ciency of managerial decisions, but fi nally – and critically – on practical action. The sector of education has a function that also addresses this side of economy’s eff ect on labor productivity. It is confronted with the need to build in a timely manner human resources that meet the requirements of the innovative nature of modern economy’s development, human

58 Human Capital and Education. М., TEIS, 2009, p. 172


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resources for progress in science and technology, to restructure the material basis of production, to train competent specialists with ample knowledge and adequate skills in nationwide management59, people motivated to create and work proactively, aspiring to and persistent in adopting innovations.3. With understanding the importance of training and education for development of the nation’s produc-tive forces, ‘Education’ Project was launched in Russian in 2006 as a top-priority national project intended to be further transformed into a national program for the development of education. As one of the key directions under the Project and the related Program, government support is provided to the process of education and upbringing of the new generation, at the federal and regional levels. The main goal of com-prehensive projects for modernization of education as basis for modernization of national productive forces is to give access to high-quality general education to all children regardless of where they may live. Here the quality of education is understood as the extent of satisfaction of current and future needs and demands of the individual, society and state, including social mobility, occupational and personal success, physical, mental and moral integrity of Russian citizens.4. Comprehensive projects for modernization of regional systems of education envisage the creation of a new remuneration system for workers in general education in order to improve teachers’ incomes, switch to a standard-based per-capita fi nancing model for general-education schools, build a system to evaluate the quality of education, develop a network of general-education schools in the region, and involve the public more deeply in education.5. The institutional restructuring now underway in Russia’s economy has changed the industry-based sys-tem of education. Industrially-oriented educational institutions for secondary and higher vocational levels have become much less ‘active’. The infl ux of students from other cities to industrially-oriented colleges in major cities tends to ebb. Forced by an array of processes taking place in regional economies, colleges have had to respond aggressively to such changes by reinforcing the peripheral vectors in their activities.6. At the same time, the period during which new conditions for political, economic and social life are shaped in individual areas of the nation helps regional legislatures and executive governments develop an interest in establishing and improving vocational education as an active component in the life of Federal Subjects60.7. The demographic crisis currently at work in Russia aggravated by the problem of the brain drain presents one of the most serious threats to the national economy’s transition to innovation development, which is unthinkable without adequate human resources. The existing demographic situation and emerging ad-verse trends hamper steady growth of the economy and improvement of the people’s welfare and can re-sult in a disastrous reduction of working age population, a deteriorating demographics, and obsolescence of the country’s main human resource during the transition to an innovation economy. The ongoing out-fl ow of skilled – particularly young – specialists from Russia undermines the scientifi c, creative and cultural potential of Russian society, and aggravates the problem of Russia’s dependence on external technologies.8. To improve the demographic situation and gradually increase human potential, and to build a reserve of competent managers and specialists for the burgeoning innovative economy, a comprehensive federal government program is necessary to control demographic and social processes; this includes government policy in immigration, a program to recruit skilled immigrants, and activities to stimulate internal migrat-ing mobility of Russian population.9. Enforcement analysis of Federal Acts ‘On Education’ and ‘On Higher and Postgraduate Education’ dem-onstrates that some of their provisions are not fully enforaceable, while recommendations off ered by the

59Ibid, p. 177

60Ibid, p.270


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experts of ‘Education’ national program remain unenforced, and thus the quality of the educational fi eld leaves much to be desired in terms of implementation of the action plan to develop Russia’s innovation economy.10. The social split creates a serious education gap between children from diff erent social strata, which cre-ates premises for further diff erence in future.11. Comparisons show that Russian children are seriously behind their peers from industrially developed nations in learning practical useful science concepts, skills and data. For the purposes of our systems of ed-ucation of children and teenagers, we need to develop educational standards, including those to address the list of competencies given in par. 15.2 of this Chapter, with continuity ensured in the standards for the system of general secondary and occupational college education. 12. The system of continuous occupational education (elementary-secondary-higher) is developed inad-equately, and this restrains technical and technological upgrade of economy, preventing effi cient mod-ernization of the social sphere; it is also a constraint on development of innovative economy and national modernization. We need to retrofi t the existing structure of vocational education, and optimize the pro-portion ratios of students in the system ‘vocational school – college – university’.13. Our higher education is inadequately integrated with science research; this impacts the quality of spe-cialists trained, and undermines the potential for science research in Russia.14. Implementation of the top-priority national project ‘Education’ revealed shortage of manpower needed for a national innovation economy, which in fact must be trained in advance compared to the schedule of the nation’s innovative development.15. Innovative development of the economy assumes reproduction of the innovative workforce: training specialists in new areas of engineering and technologies, economics and management, in-creasing the role of additional occupational education, to prepare workers who possess innovative abilities and competencies, understood as knowing how to independently initiate innovations in the course of work, find something new in others’ experiences and adopt it in their organization. This is exactly why we need to seriously strengthen the role of innovative management as an area in science research and academic subject, and as a practical tool to develop Russia’s innovation economy. The scale on which specialists and managers are trained for an innovation economy in Russia has to be expanded seriously.16. It is necessary to create methodological training complexes in secondary and higher occupational schools nationwide to train managers and specialists for an innovation economy under a special inno-vative management curriculum addressed to individual groups involved in the R&D process, which will strengthen the innovative potential of schools as educational institutions, and as a result will satisfy the demand of national innovative economy for managers and specialists.17. The system of innovation management training must involve all participants of the innovative process, from researchers to inventors to end users of the results of innovative work.18. As conditions are created to develop the human resources for the Program to restructure Russia’s pro-ductive forces, eff orts must be focused on modernizing the entire system of instruction, upbringing and education of Russian citizens. The goal of the human resource program as regards instruction and educa-tion of Russian citizens is determined by the workforce reform program, the strategy to modernize and develop the innovative component of national economy. Hence, the goal of the instruction and education policy is to secure Russia’s competitive position among world leaders in education.19. Special attention must be given to training a new generation of teachers, to restore the system of insti-tutes for advanced training and retraining of faculty who possess special knowledge, skills and techniques in instructing, training and educating Russian citizens of all age groups in the context of national moderni-


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zation, teaching the skills of innovative thinking, thus raising Russia’s investment value in the eyes of other nations.20. We need to considerably improve the effi ciency of the system for upbringing and education of children under school age, ensuring maximized coverage of fi ve to six years old children (primarily those from low-income families, to off er them equal starting opportunities in school education).21. To meet children’s individual needs for knowledge during their entire period of the general-education school, we need to create conditions to ensure access to additional education.22. To raise the quality of educational work, the infrastructure for continuous vocational training must be developed, including the creation of a system of public vocational organizations where employers must be suffi ciently represented; the employers’ eff orts should be directed to develop market-based qualifi ca-tion requirements for implementation of occupational training programs that would train managers and specialists for various industries of the innovation economy, search and select modern innovative training technologies, and conduct control evaluation (certifi cation and accreditation) for the quality of education-al programs61. 23. State-private partnership organizations must also be involved in the fi eld of instruction and education for the purposes of the human resource program. The purpose of such partners is to bring together the re-sources in government and business to train competent manpower for the emerging innovation economy in Russia, to ensure equal responsibility for the quality of vocational education, more justifi ed and motivat-ed planning to satisfy the needs in training competent managers and specialists, to provide the national economy with expertly trained employees of mass occupations such as technicians, workers, service per-sonnel, to ensure complementary relations between government-contract training and target corporate training programs, and to support competitive and innovative national development62.24. To achieve these goals and objectives of human resource support to implementation of the Workforce Reorganization, Modernization and Development of Innovative National Economy Program, we need to create a three-level system of manpower supply control centers (MSCC) for implementation of the Program. The system must consist of the Federal Control Center, regional centers and local centers, in the format of governmental, public and/or government-private organizations. 25. The Federal MSCC is to participate to develop national innovation policy. It will develop the govern-ment’s policy and programs in instruction, education and employment of Russian citizens, develop the regu-lations (including legislation) to build and develop an innovative workforce, it will determine the bulk of budget fi nancing for these processes, build innovation centers, foundations and other federal-level bodies, it will shape the government’s policy toward young citizens, and institute prizes and scholarships in sci-ence and high-tech, and a system to protect intellectual property.26. Regional MSCC centers will specify HR policy and allocate additional fi nancing for it based on specifi c objectives. Among other things, they will develop regional programs and forecasts for the development of instruction and education, programs and forecasts for employment, business enterprise and innovations; they will create subjects of innovative activities, develop programs for regions to participate in technology chains; it will also institute regional-level prizes and scholarships for achievements in science, engineering and technologies, and organize regional contests and grants in the fi eld of innovations.27. The role of municipal manpower supply control centers for the program must be especially highlight-ed, because it is the municipal level that will have to identify and support talented children, and provide career consulting for them (through instituted various formats of creative science and engineering activi-

61Ibid, p.274

62Ibid, p.280


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ties for young people), to promote benchmark experience and achievements and to support innovative small businesses. Specifi c businesses resident in respective municipalities must develop (and/or attract) innovative projects, build innovative teams, motivate and provide incentives for employees’ creative activi-ties, organize in-house cooperation, labor specialization and enhancements, continuous training, career planning based on employee’s personal characteristics and innovative abilities, extensive opportunities for their creative work and current innovations, and workmanship contests.28. The system of manpower control centers must promote and update activities to instruct Russian citi-zens about modernization and innovative development, in order to rear competent and responsible, mor-ally and physically healthy young citizens; activities to raise the status and signifi cance of general and addi-tional education for children; it must also update eff orts for social development of children and youth, and assure their right to high-quality education and creative development.29. To monitor the results of the Program, a system of balanced implementation indicators must be worked out at three levels: federal, regional and local, as well as for age groups of Russian citizens. At the same time, the MSCC system specialists must monitor the results using detailed indicators.30. Guiding principles in activities of the subjects of manpower supply control for the program, and therefore for operation of the MSCCs, must be as follows:30.1. Systems approach, to refl ect interrelation and interaction between all elements in the human re-sources system for the Program; 30.2. Complex and Integration approach, to consider all aspects of the human resources (economic, fi nan-cial, legal, political, etc.);30.3. Coordination and synchronization of parallel management processes to control objects in diff erent age groups;30.4. Coordination and synchronization of parallel management processes by control subjects (govern-ment, government-private, public bodies to manage manpower supply for the Program);30.5. Coordination of processes for ongoing and strategic manpower supply management (i.e. ‘simultane-ously addressing the objectives of pursuing and leading development’)30.6. Continuity in implementation of processes ‘instruction’, ‘upbringing’, ‘education’, ‘manpower reserve training’, as key ‘elements’ in HR system;30.7. Succession of results in managing the country’s population age groups based on the Life Long Learning Concept


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