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Top 14 Most Interesting Studies in Economics in 2014, Relevant to Russia

How Russia has become an industrial economy; Class bias in Russia's judicial system; Why Russia could benefit from zero import duties with the EU; Why Russian elites prefer foreign jurisdictions; What is fake economic growth; Why the reforms of the 2000s have failed; Whether currency depreciation must inevitably lead to inflation—these were the most interesting research papers in 2014 relevant to Russia, according to Opec.ru.

'Interesting' is a subjective notion; no two lists of the most interesting academic papers are exactly alike. We have selected those which may be relevant, engaging, and helpful for researchers of related fields, policymakers in the socio-economic sphere, and a broad audience of people interested in economic and social issues. As far as possible, research included in the list is available online.

Some papers were first published in 2013 but widely discussed at seminars and conferences in 2014. The list does not include papers that made it into the Top 15 most interesting reports of HSE’s XV April Conference.

1. Anton Cheremuhin (Federal Reserve Bank of Dallas), Michael Golosov (Princeton), Sergei Guriev (Sciences Po), Alex Tsyvinski (Yale). The Industrialization and Economic Development of Russia through the Lens of a Neoclassical Growth Model.

Between 1885 and 1940, Russia's economy transformed from agrarian to industrial. In Soviet Russia, industrialization progressed much faster: between1928 and 1940, some 30% of the country's workforce moved from the agricultural to the industrial sector. It is believed that in Tsarist Russia, with over 80% of labor force working in agriculture, the inefficient agricultural sector was a barrier to industrialisation, while the Soviet collectivisation policies in agriculture gave a big push to industrial development. The study shows that this is not true.

Before the Soviet revolution, industrial monopolies and high entry barriers—incorporating a new company required a special concession from the Tsar—rather than the agrarian sector, hindered industrial development. Many industrialists were earning most of their revenues from state subsidies, public contracts and high tariffs imposed by the state.

Following the economic reforms of the 1890s, cartels dominated most industries, imposing wholesale prices and distributing sales quotas among their members. This resulted in an inefficient and slow growth of industry. After the Russian Civil War, these barriers to growth were removed, and labour productivity increased dramatically both in the agricultural and the industrial sectors. Another version of this study provides a more detailed discussion of the economic policies during Soviet industrialisation.

2. Andrei Markevitch (NES), Ekaterina Zhuravskaya (Paris School of Economics). Economic Effects of the Abolition of Serfdom: Evidence from the Russian Empire.

The abolition of serfdom led to a powerful economic boost for the Russian Empire. There was a sharp increase in labor productivity in the agricultural sector, peasants' living standards, and industrial development. In contrast to emancipation, the land reform which led to more powerful peasant communes had a negative effect on the same indicators. Estates where serfs were obliged to work on the landlord’s farm (barshchina) and estates where serfs were required to make in-kind payments to the landlord (obrok) were approximately equally productive, but the former arrangement was associated with better living standards, reflected in an increase in the height of their children by 1.6 cm on average due to better nutrition.

3. Vadim Volkov (Institute for the Rule of Law at the European University of St. Petersburg). Socio-economic Status and Differences in Sentencing: Data on Criminal Proceeding in Russian Courts.

Russia's criminal justice system has a strong class and status bias. Based on a review of 1.6 million cases from 2009 and 2010, the author found that defendants of lower social status, such as current prison inmates, unemployed individuals and manual workers, who account for the vast majority of those facing criminal charges, tend to face tougher sentences. In addition, entrepreneurs tend to be punished more harshly for the same crimes than civil servants of comparable social and demographic status.

See an article about this research at Opec.ru.

4. Alexander Knobel, Bekhan Chokaev (the Gaidar IEP, RANEPA). Potential Economic Consequences of a Trade Agreement between the Customs Union and the European Union.

If the Customs Union countries signed an agreement with the EU to establish zero import duties, Russia would benefit to a greater extent than the EU, because duties on European goods in Russia are higher than duties on Russian goods in Europe.

However, the benefits of a free trade agreement with the EU would not be the same for all CU member countries—e.g. Belarus would lose out, since its exports to Russia would be replaced by European goods, while Kazakhstan would benefit to a lesser extent than Russia, since it trades less with the EU (see an article at Opec.ru). Russia would benefit from a partnership with the EU both in the short and the long term.

Only two Russian industries—the automotive and the wood and paper industries—will not benefit from trade with the EU in the long term. Household consumption would increase both in the short and in the long term. Thus, it would be in Russia's economic interests not to oppose Ukraine's free trade agreement with the EU, but rather to seek such an agreement for Russia.

5. Delphine Nougayrède (DLA Piper, Columbia University Law School). Outsourcing Law in Post-Soviet Russia

Between 1992 and 2013, legal outsourcing in Russia reached unprecedented proportions. A significant portion of the Russian economy is placed in corporate or contractual structures governed by foreign law rather than Russian law. Many commercial disputes are heard in foreign courts or tribunals. In 2012, some 50% of the cases examined by the London Commercial Court (and 80% of all cases involving foreigners) were thought to involve Russian parties. Cases involving Russian parties came second in the London Court of International Arbitration (LCIA), closely following those involving the UK parties and far ahead of any other country. The situation was similar in the Stockholm Arbitration Court .

Legal outsourcing is driven primarily by the Russian economic elite's avoidance of Russia’s judicial system in order to mitigate political risk and protect their assets. Russia's legal system is losing the competition of jurisdictions. The Russian economy is open to the world, but regulators have failed to implement adequate contractual, corporate, and tax law for it to operate effectively. Thus, the weakness of the country's legal system and legislation, combined with its openness to the world (enabling dispute resolution outside the country) and high political risks make Russia an ideal candidate for extensive legal outsourcing. On the supply side, Russia's largely deregulated market for legal services dominated by foreign law firms contributes to the situation.

6. Giovanni Covi (ECB, University of Verona). Dutch Disease and Sustainability of the Russian Political Economy

The 'Dutch disease' is overall price growth through an inflow of currency to a country leading to deindustrialisation and stagnation of economic sectors other than those associated with the key natural resource. Russia has several symptoms of the Dutch disease:

1) economic growth dependent on oil and gas prices;

2) the ruble, even more dependent on oil prices, has become a commodity currency (a decline in oil prices affects the exchange rate more than its growth);

3) weaker development of the manufacturing industry compared to the services sector. Underinvestment and imbalance has led to 'fake economic growth' driven only by the energy and services sectors;

4) an increasing wage gap between the energy sector and the rest of the economy;

5) a lack of financial resources due to capital outflow, high domestic loan interest rates, and insufficient foreign direct investment.

The Dutch disease has manifested itself in the strengthening of the ruble, decline in the processing industry and related employment, and growing wages. This disease makes returning to normal development extremely difficult. The entire economic structure is adapted to high oil prices, but its 'export in order to import' development pattern is extremely unsustainable. In response to the shock of declining oil prices, the government has to increase spending or to allow unemployment to grow.

Oil rents may contribute to political stability, but only under authoritarian regimes, according to the paper Oil, Political Power, and Stability by Kjetil Bjorvatn (Norwegian School of Economics) and Mohammad Reza Farzanegan (Philipps University of Marburg). Using panel data for more than 120 countries from 1984 to 2010, the authors show that oil rents can promote political stability, but only when political power is sufficiently concentrated.

Recent research on the 'resource curse' is summarised in the paper by leading expert on the subject Michael Ross (UCLA) in What Have We Learned about the Resource Curse?

7. Daniel Treisman (UCLA). Twenty-five Years of Market Reform: The Political Economy of Change After Communism.

Over the twenty-five years since the fall of the Berlin Wall, the former communist countries have made tremendous progress. Many of them have become full-fledged market economies and political democracies. The speed of economic reforms in the early post-communist years determined which countries would achieve greater progress. Countries have converged economically and politically towards their nearest neighbors outside the Soviet bloc. See also the article by Treisman and Andrei Shleifer 'Normal Countries: The East 25 years After Communism'.

Some Russian developments in 2014 challenged Treisman and Shleifer's 'normal country' concept. Treisman presents a more optimistic longer-term perspective in his recent paper 'Income, Democracy and Leader Turnover' showing that 10 to 20 years of higher income tend to induce breakthroughs to more democratic politics in authoritarian regimes, which eventually become democracies. In the short run, however, faster economic growth increases the odds of survival for an authoritarian ruler. Once autocrats leave the scene, their countries are usually ready to transition to democracy.

8. Vladimir Gelman, Andrey Starodubtsev (both from the University of Helsinki, the European University of St. Petersburg). Opportunities and Limitations of Authoritarian Modernisation: Russian Reforms of the 2000s.

Russia's authoritarian modernisation of the 2000s has failed. Despite a favourable political context, the tax system has been the only successful reform, while other reforms produced only partial or zero results.

The problem was not the oligarchs or regional barons resisting change. Instead, the main reasons for failure were:

  • political constraints due to electoral authoritarianism and poor governance;
  • vertical and horizontal silos within public administration making effective reforms impossible.

The political leaders' reliance on bureaucracy hindered the implementation of those reforms which bureaucrats disapproved of; thus, the desire to maintain the status quo often outweighed the desire for change, and ultimately, modernisation has become an empty word used by elites to cover up their efforts to hold on to power.

9. Pavel Trunin, Yuri Ponomarev (the Gaidar IEP, RANEPA). The Price Transfer Effect of Exchange Rates in the Russian Economy.

A highly relevant issue for Russian economy today is the effect of exchange rate fluctuations on prices. In the U.S., this effect is minimal: dollar depreciation by 100% leads to price increases of 1% to 2% over 4 to 8 quarters, respectively. In contrast, the effect is strong in Mexico, where similar rates of national currency depreciation would lead to price increases of 76% to 139% and in Hungary, where price increases would stand at 48% to 91%.

In Russia, according to Maria Kataranova of the Economic Expert Group, the short-term and medium-term price transfer effects stood at 19% to 32% in 2000 to 2008. This only applies to depreciation, while the effect of the ruble's appreciation stands at about half of that, and prices do not drop as drastically. According to Trunin and Ponomarev's estimates, the price transfer effect stood at 5% in the first month, 18% after three months, 39% after six months, and 79% after one year. Prices take a while—about a year—to adapt to the new exchange rate.

It does not mean, however, that consumer inflation will reach 55% in a year's time (the rouble to U.S. dollar exchange rate dropped by some 70% over 2013). The transfer effect will be partially offset by a drop in effective demand.

10. Maxim Ananyev (UCLA), Sergei Guriev (Sciences Po). Effect of Income on Trust: Evidence from the 2009 Crisis in Russia

The level of social trust drops during crises. In 2009, Russians saw a noticeable decrease in their incomes, mainly in regions that produce capital goods and those depending on oil and gas. This had an effect on generalised social trust (the share of respondents saying that most people can be trusted; the average level of trust in Russia is 25%). Since then, social trust in Russia has not recovered to pre-crisis levels. A greater decline in social trust was observed in those regions which experienced a more significant decrease in income. All other things being equal, a 10% decrease in income leads to a 5 p.p. decline in social trust (down from the average of 25%).

11. Maria Shklyaruk (Institute for the Rule of Law at the European University of St. Petersburg). Legal Statistics: A Systemic Conflict between Knowledge of Crime and Departmental Reporting.

Once the law enforcement system processes crime statistics, they cease to be a source of knowledge about crime; instead, their main function is to feed into the performance appraisal of law enforcement agencies, units, and officers. Thus, using Russian official crime statistics to keep track of criminal activity and to inform criminological research, forecasting, and policy-making does not make much sense, since the data accuracy declines once law enforcement agencies process the statistics to make them fit their reporting requirements.

Not only are Russian crime statistics unreliable; in addition, law enforcement agencies often withhold information even though making it public would do no harm, according to a study by Maria Shklyaruk, Marina Amara (Transparency International Russia) and Ivan Begtin (Civic Initiatives Committee) Criminal Statistics and Police Transparency.

Instead of publishing crime statistics, Russia's law enforcement agencies simulate openness by feeding the public fragmented news designed to paint a positive picture of the law enforcement system, while withholding any data that would enable an impartial assessment of police performance.

12. Kirill Kalinin (University of Michigan at Ann Arbor). Is There Anything Wrong with Putin's Electoral Ratings? A Study of 2012 Russian Presidential Elections.

Since the winter of 2011-2012, Russian elections, political upheaval and transformations have proved to be fertile ground for research. Kalinin attempts to demonstrate that the Russian president's electoral ratings may have been inflated in recent years. The source of this inflation may have been the social desirability bias of the respondents. The more respondents give the 'correct' rather than a truthful answer, the less reliable is the rating based on these responses.

The problem, according to Kalinin's other paper is that for a respondent whose views differ from those of the majority there is no benefit in answering questions truthfully, but the cost can be high—if, e.g. their boss at work learns about the dissent.

Under authoritarian regimes, not only surveys, but also electoral projections produced by sociologists are biased, according to Kalinin's paper 'Unifying the Concepts of Electoral Fraud and Preference Falsification: Case of Russia'. The problem is that survey errors due to social desirability bias, also termed preference falsification, are conducive to electoral fraud when the authorities rig election results to fit the opinion polls and to convince the public that the vote count has been honest. Dmitriy Vorobyev of the Ural Federal University explores the reasons why voters visit polling stations even though the election outcome is predetermined in his paper Participation in Fraudulent Elections.

13. Vadim Novikov (RANEPA), Ella Paneyakh (Institute of the Rule of Law at the European University in St. Petersburg), and Laysan Khaliullina (Institute for Economics, Management and Law, Kazan). The Influence of Bureaucratic Evaluation and Reporting Systems on the Federal Antimonopoly Service's Operation and Performance.

The Russian FAS is the biggest antimonopoly agency in the world, initiating a record number of investigations against private and public entities each year. Its impressive statistics, however, are driven by small and marginally important cases, including investigations against SMEs. Why would the FAS take up such cases? The reasons are not poor management or high level corruption, but the agency's overly bureaucratic performance appraisal and reporting system, which focuses on gross numbers (the same type of performance criteria that are used by Russian law enforcement agencies). Another study by Novikov and Paneyakh The Needlessly Suspicious Agency: The Implications of an Appraisal System Based on Quantitative Targets for the Federal Antimonopoly Service reveals that SMEs account for 36% of all companies featured in FAS resolutions and 65% of those listed in the official register of monopolies.

14. Yuri Simachev, Mikhail Kuzyk (both from the Independent Analytical Centre, RANEPA), Boris Kuznetsov (HSE), and Yevgeny Pogrebnyak (RANEPA). Industrial Policy in Russia in 2000-2013: Institutional Features and Key Lessons.

The article describes Russia's industrial policy between 2000 and 2013. Simachev and Kuznetsov review Russia's industrial policies of the 1990s in another paper entitled The Evolution of Industrial Policy in Russia.

In the 2000s, Russia favoured a top-down industrial policy pursued and financed by the state, in particular through large state-owned corporations. Since the 2008-2009 crisis, the government's industrial policy has been explicitly selective and focused on supporting a limited number of companies. An industrial success story of this time was the launch of Russia-based assembly lines for major international car manufacturers. Another major industrial intervention—the nanotech industry—was far less successful.

Simachev, Kuzyk, and Vera Feigina suggest which industrial policies may work best, based on a large survey of Russian companies in the report Russian Policies in Support of Innovation: Elusive Quest for Efficiency. In particular, they found that tax incentives are effective, while the government's funding of innovation drives away private investors. In addition, the design of such support measures is unfriendly towards new companies. In recent years, according to Kuznetsov's Post-crisis Challenges for Russia and the Crossroads of State Industrial Policy, the Russian government's industrial policy has shifted from creating tax incentives for a variety of enterprises to financing state-owned companies—a strategy previously found inefficient.

Interestingly, Russia's industrial policy has increasingly focused on Soviet-era large industrial facilities. Meanwhile, as shown in a study by Helena Schweiger (EBRD) and Paolo Zacchia (Berkeley) Are Science Cities Fostering Firm Innovation? Evidence from Russia's Regions, Soviet-era science cities with their high concentration of R&D facilities and human capital could serve as a basis for the country's innovation policy. According to Schweiger and Zachchia, innovative activity is much higher in science cities like Dubna and Tomsk than in the average Russian city.

***

Limiting the list to just 14 papers is extremely difficult; therefore, a few more papers worth reading are added below.

A) Hartmut Lehmann (University of Bologna, IZA), Anzelika Zaiceva (University of Modena and Reggio Emilia, IZA). Informal Employment in Russia: Definitions, Incidence, Determinants and Labour Market Segmentation.

This OECD report provides a detailed description of the various approaches to measuring informal employment. Males who are relatively young, unskilled and employed in construction and trade have a higher likelihood to have an informal job. Wage gaps between the informal and formal sectors in these industries are only found in the upper and lower quintiles of the informally employed. The former tend to earn lower than average, while entrepreneurs and self-employed earn higher than average wages.

According to Andrey Pokida's (RANEPA) paper The Scope and Effects of the Gray Economy across Spheres of Economic Activity in Russia, 40% of respondents are at least partially—by having a side job or sporadic earnings—involved in informal employment, while 52% are happy to make informal payments for services.

B) Yevsei Gurvich (EEG), Alexei Kudrin (CIC). A New Growth Model for the Russian Economy.

Russia used its $2.1 trillion oil and gas windfall gained between 2000 and 2013 to move away as far as possible away from free market principles. As a result, the correlation between the oil price and Russia's GDP growth reached 0.93, meaning that the country's economic growth relied entirely on imports.

The core problem is that the market environment is weak and dominated by public and quasi-public companies, disrupting the system of business incentives, since state-owned companies are focused on spending public funds rather than maximising profit, therefore they do not bother to cut costs. A distorted competitive environment fails to reward the best companies and push the worst ones out of the market. Market entry and exit barriers are very high. High risks force companies to prefer short-term gains over higher long-term profits, while business planning horizons are extremely narrow, since the rules of the game are changing all the time.

C) Sergei Sinelnikov-Murylev (RFTA) Sergey Drobyshevskiy, Maria Kazakova (both from the Gaidar IEP, RANEPA). Decomposition of Russia's GDP Growth in 1999-2014.

The authors deconstruct the growth rate of Russia’s GDP into its structural, foreign trade, and situational components. While structural growth has been declining for nearly a decade, the foreign trade component was showing positive growth until recently, even though its impact was declining, and the situational component has not demonstrated positive growth since 2008.

Based on the dynamics of the thee components, the authors identify several phases of Russia’s economic growth between 1999 and 2014: recovery growth (1999-2000); growth sustained by investment and capital load (2001-2003), and then growth sustained by favorable foreign trade conditions (2004-2008), overheated economy and economic crisis (2008-2009), followed by a new, lower phase of the business cycle (after 2010). High oil prices helped to mitigate the impact of the 2008-2009 crisis, and then for a few years protected the Russian economy from recession.

D) Alexander Libman (Frankfurt School of Finance and Management), Joachim Zweinert (Witten/Herdecke University). Ceremonial Science: The State of Russian Economics Seen Through the Lens of the Work of 'Doctor of Science' Candidates.

Over the past quarter century, the 'Berlin Wall' between the Russian and global economics has become much thinner, yet still has not fallen. By looking at recently defended 'Doctor of Science' theses, particularly at the large-scale universities where most administrators and bureaucrats are trained, the authors show that Russian economics remains a mostly 'ceremonial' science, and its integration into the international scientific community is still very low.

The Marxist and Leninist legacy lives on in today's 'research' papers; the purpose of most theses is to present a verbal argument in a more 'scientific' manner. The topics, methods, and ideas discussed in the reviewed theses seem to be isolated by an 'iron curtain' from international academic discourse. The number of citations in the theses indicates that the authors have poor familiarity with modern economic science. If ideas matter for institutional change, the re-integration of Russian economics into the global scientific community seems to be a prerequisite of its potential to catch up.

E) Noah Buckley, Timothy Frye, Scott Gehlbach (all from Columbia University, HSE) Cooperating with the State: Evidence from Survey Experiments on Policing in Russia and Georgia.

What factors affect citizens' willingness to cooperate with the state? The researchers explore this question through a study of citizens' willingness to cooperate with the police, using data from a set of survey experiments conducted in Russia in December 2012 and in Georgia in June 2013.

They found that a citizen’s willingness to report crimes to the police depends on the nature of the crime, rather than on the police behaviour. In contrast, financial incentives, administrative constraints, and methods of engaging with the police do not have a big impact on cooperation. However, there is one instrument under state control which may increase willingness to cooperate—the guarantee of anonymity to witnesses who report crimes.

F) Natalya Volchkova, Tatiana Zueva, Olga Kuzmina (NES). Foreign Direct Investment and Governance Quality in Russia.

The authors found that the higher frequency of using illegal payments and stronger pressure from regulatory authorities in Russian regions both negatively affect foreign direct investment (FDI), while moving from the average to the top governance quality across Russian regions more than doubles the FDI stock.

G) Sambit Bhattacharyya, Paul Collier (both from the University of Oxford). Public Capital in Resource Rich Economies: Is There a Curse?

Resource rich economies are often advised to invest some of the revenues in other public assets for sustainable future growth. However, the authors use data for 45 countries between 1970 and 2005 to show that the possession of rents from natural resource depletion has typically significantly reduced public capital, information which completes an important missing link in the analysis of the ‘resource curse’.

 

January 16, 2015