IN TRANSLATION: “The Country’s Leaders are Working with Erroneous Economic Data”

Opinion piece for Ogonyok. Guest translation by Connor Odekirk. 

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“The deeper the problem, the harder and more expensive it is to solve.” Photo: Ogonyok Archinves

Our piece, “Don’t Understand Russia Through Labor” in which Russia’s low labor productivity was discussed, resonated widely among readers. Serious academics responded: Grigory Khanin, Professor at the Siberian Institute of Management and Public Policy and State Committee under the President of the Russian Federation, and Dmitry Fomin, Associate Professor of Economics and Management at Novosibirsk State University. They believe that the official statistical data upon which government agencies and the authors of the publication in Ogonyok rely does not accurately reflect the realities of Russia’s economic situation.

The following is their letter, as our editors received it.

“Your journal duly notes the anxiety that surrounds labor productivity and inefficiency in the Russian Federation. You pay fair attention to the obsolescence of Russia’s industrial base. However, the authors’ argument is weak insofar as the Rosstat data upon which it relies embellishes the reality of Russia’s economic situation, just as the Soviet Union’s Central Statistical Directorate did before it. We have produced alternative calculations of all macroeconomic indicators in the Soviet Union and Russian Federation, beginning in the 1970s, based on more credible indicators of Soviet and Russian statistics. As such, we are able to clarify the calculations of Rosstat. The article extremely undervalues the inconsistency in levels of labor productivity between Russia and developing countries. If you take the highly suspect data to be natural, you will discover a disparity of 5-7…

The authors greatly underestimate the degree to which physical capital has deteriorated. With records of the actual value of fixed assets from 1991 to 2015, we have produced alternative calculations that show the depreciation of Russian and Soviet fixed assets during this period. Our calculations show that the depreciation of fixed assets in 2015 amounted to 64.4 percent rather than 49.4 percent as was recorded by Rosstat. In order to best understand the problems surrounding fixed asset depreciation, it is necessary to consider the degradation of human capital (for example, the catastrophic decline in education, which began in the 1970s and continues presently). The task of Russia to overcome underdevelopment in labor productivity is an exceptionally challenging one. It is one that requires the strength and sacrifice of an entire society.”

Ogonyok asked one of the authors of this letter – Grigory Khanin – to explain what’s wrong with the statistics to which everyone, from governing bodies to ordinary citizens, is referring.

Q: What discrepancy in the data exists between the official statistics and your assessment of macroeconomic indicators of development in Russia?

A: According to the data that Dmitry Fomin and I collected, compiled over many years of research, Russia’s GDP did not at all grow by 13.4% between 1992 and 2015, as Rosstat contends. Rather, it shrank by 10.2%. Labor production in Russia during these years decreased by 30.1 percent rather than increase by 9.2 percent as official reports suggest. Fixed production assets (buildings, facilities, cars, machinery, equipment, and other assets that contribute to production) shrank by 29.2% of the entire account value. However, the official statistics contend that they grew by 50.9%.

Q: How do you explain such a discrepancy?

A: The official statistics incorrectly calculate the fixed production assets. Physical capital is an important economic resource. It, together with human capital, determines the level of growth and controls the dynamics and magnitude of GDP and other macroeconomic factors. There hasn’t been a single statistical figure, neither during the Soviet Union nor since its collapse, which has been distorted in such a way. This value is rather complex, and many countries have difficulty with it. It even proves challenging to the World Bank, which conducts its own calculations on the basis of official data from every country, including that of our own Rosstat.

Q: What does the incorrect assessment of Russia’s fixed assets mean?

A: First of all, taking into account inflation, which has more or less always existed throughout the history of the Soviet Union and Russian Federation, the underestimation of our fixed assets leads to an exaggeration of their dynamics, insofar as fluctuations in the ruble must be considered when evaluating old and new assets. Older assets, for example, must be evaluated within the context of a more expensive ruble, whereas newer ones should be looked at oppositely. All of this informs the underestimation of asset depreciation and cost value of products. Profits, therefore, appear larger than they really are.

Q: So you’re saying that we are misrepresenting the state of our own economy?

A: Yes, and this problem has persisted since the end of the 20th century, when our assets, by my calculations, were underestimated by two times their worth. Accordingly, we did not take into account the means that were spent on the recovery of our assets and the increase in price of production. During the 1930s and 1940s, underestimation, despite separate industry revaluations, continued to increase. Only in the year 1960 was a universal revaluation of our primary assets conducted; however it contained a not insignificant mistake. Following this revaluation, in connection with continuing inflation, our primary assets were undervalued at a growing rate and by the end of the 1980s were undervalued by four and a half times their true worth. By 2015 that number had grown to seven and a half times.

In the Soviet economy all data that characterized the dynamics of manufacturing and production and the growth of national revenue, including the worth of our fixed assets, was distorted. Soviet data should be considered more or less reliable concerning the manufacturing of products in physical terms (tons, pieces, etc.), insofar as it served as the basis for planning.

Q: And during the 1990s, when we transitioned to a market economy, did the problem stop?

A: At the beginning of the 1990s Russian statistics adopted international standards. We essentially got rid of the drawbacks in Soviet statistics; however, new problems arose. During the 90s we attempted to reevaluate our assets several times, but nevertheless the official statistical data pertaining to the dynamics of our fixed assets was incorrect.

Q: And what, by your calculations, was the scope of such calamity?

A: We finished the full calculation of the dynamics of our fixed assets from 1991 to 2015, with a year-by-year breakdown, just this year. I have to admit that the result was surprising. I need to stress that our calculation does not pretend to be completely accurate (such macroeconomic statistics simply are not known); however we are sure of its objectivity. The volume of our primary assets at the residual value (taking into account wear) by 2015 declined approximately two times by comparison to that in 1991 (this indicator differs from book value, where modernization spending is added to the initial cost of capital). This is much bigger than the losses of the Second World War! At that time assets declined at 33.5%. And moreover, the loss of our fixed assets with regard to their deterioration over the course of the past 25 years accounts for 442.5 trillion rubles. This is equal to Russian GDP over the last five years.  Our primary assets declined because capital investments in the wake of the Soviet Union were less than the rate at which we depleted our assets. However, Rosstat does not account for this and even tries to convince us of the opposite: that physical capital has grown since 1991 by 51%. This all radically changes valuations of economic profitability because it dramatically increases the cost of depreciation of fixed assets. According to our calculations, in the early 2000s, as a result of their revaluation, a major branch of production of goods experienced huge losses, while sectors of market services were highly profitable. However, focusing on official income data, tax authorities levied taxes primarily to unprofitable sectors of the production sphere, exacerbating their financial problems and, to a degree, collected taxes from service industries.

Q: And how is our economy today?

A: Let’s begin with the fact that we still possess half of our fixed assets. I should point out that in some sectors it would be better to spend those assets, so in this regard our market economy is well off. The largest reduction of our fixed assets occurred in the sphere of production, while our assets grew in the sector of market services. At the same time these two industries were almost created from scratch with foreign capital from the beer and confectionary industries. The service sector in Russia has roughly doubled in size since 1991. This has to do with the private economic sector – retail and wholesale goods, food services, trade logistics, the hospitality and tourism industries, automobile servicing, privatized healthcare, communications, information services, and so forth. In public service industries, such as public health services, the sciences, education, sports and physical education, recreation, housing and communal services, and road management, our fixed assets have declined, though not as noticeably as in the industrial sphere. In Soviet times we witnessed an imbalance. Heavy industry was emphasized despite the presence of underdevelopments in service and consumer industries. Now we are seeing an exaggerated development of market services and underdevelopment in the investment sector of the economy.

Q: By your calculations, how have GDP dynamics changed during these years?

A: We still haven’t reached prices comparable to those in 1991. Rosstat, however, shows an excess of 13%. In this case Rosstat slightly overestimated the magnitude of the decline of GDP during the 1990s. It failed to account for a shadow economy. The true size of GDP during the ‘90s was actually higher than Rosstat claimed. On the other hand, from 1998 to 2007 official statistics significantly exaggerated a GDP growth of 82%. By our calculations, GDP growth was all of 48%. In the beginning GDP growth, along with growing oil prices, can be linked to the use of reserves of production capacity and labor forces, which were trained during the 1990s. However, by 2007 these possibilities for growth were exhausted. Inevitably the economy began to stagnate and, therefore, economic growth declined.

Q: And what about our official calculations of inflation? Are those also incorrect?

A: Yes, precisely. Undervaluation of the size of inflation can be defined, albeit rudely, by the differences seen between our calculations of GDP dynamics and those of Rosstat. This annual difference is approximately two percentage points. Instead of, let’s say, 5% a year, it’s 7%.

Q: Why do we need to calculate inflation precisely?

A: The budgeting of social expenditures depends upon it. Pensions, benefits, and any other payments with which the government compensates its citizens are determined by the magnitude of inflation. Moreover, there are additional government investment costs, which should be considered when calculating inflation. If this doesn’t happen or it is done incorrectly, then what happens quite often is that there simply isn’t enough money for new government projects.

Q: And specialists abroad have more accurately defined the current state of the Russian economy?

A: No, they all are mistaken, because they all have used Rosstat data to perform their calculations. In the 90s they decided that, because Rosstat adopted international standards, they did not need to redo their calculations. The World Bank, on the other hand, deals with 200 countries. It simply does not have the time to recalculate the economic data of every one of them.

Q: Are you saying that our labor productivity is lower than in developed countries by 5-7, or even as many as 10, times? What are these calculations based on?

A: There are two types of economists: macroeconomists and industry experts. There are also two ways to calculate labor productivity. Macroeconomists perform their calculations using a price or value index. Industry experts more often than not use non-monetary calculations.  The first type of calculation is often performed incorrectly due to the unreliability of conversion factors between the ruble and the dollar. However, it is possible to look at natural indicators for individual sectors, and in doing so, you will receive different results. Let’s take, for example, oil production. If we divide the size of production by the number of people employed in the oil industry, then we receive the output per person. We can do this for metallurgy, mechanical engineering, agriculture, or any other industry. Then we can compare these industry outputs with those of other countries. This is how we received the results that you wrote about. The assessment was performed using data from numerous industry publications in Russian economic literature.

Q: How would you rate the state of human capital in Russia?

A: We sustained an enormous demographic blow in the 20th century – war, repression, starvation, emigration. By my estimation we lost 70-80 million people. What’s more is that these losses – including those individuals who perished in the wars and those who emigrated – had an enormous impact on intellectual society. Of the four living Russian Nobel laureates, three are working abroad. Add to this the decline of our systems of secondary and higher education, which have been on the downturn since the 1970s, and the dumbing down of our population by the media, particularly electronic. Our library in Novosibirsk is one of the biggest in all of Russia. When I go there the halls are almost empty. The library staff is bigger than the number of readers. Recently I stopped by the Bavarian State Library. I wanted to cry. There was this enormous hall, it was long – almost a kilometer – and it was filled with people. In our main bookstore in Novosibirsk you might see 10-15 people. And in Munich’s? 200 people stand at the shelves or sit on the couches of the seven-storied building, looking at books, drinking coffee, chatting.

Q: Can Russia overcome the gap separating it from developed countries?

A: Overcome? It’s unthinkable. Imagine that you’re at the starting line of a race, and your competitors are already five kilometers ahead of you. You must understand that this country’s government depends upon erroneous economic data and the underestimation of a deep problem. They’re creating an illusion that it might be possible to fix our economy without serious expenditures. We’ve estimated, in terms of 2015 prices, that investments of 14.6 trillion rubles are required in order to save Russia’s fixed assets and preserve their growth at 3% a year. Additionally 900 billion rubles in working capital are required. 10.3 trillion rubles should be invested for the development of human capital – education, healthcare, scientific research. Collectively this amounts to 25.8 trillion rubles a year – a third of our annual GDP.

Q: And nothing can be done about this?

A: We can slow the bleeding. To do this it is necessary to redistribute income in favor of accumulating physical and human capital among the poorest segments of our population. Even this, however, requires enormous effort. It’s entirely possible, for example, to redistribute income and reduce the social differentiation of decile groups from the current 30:1 ratio to a 6:1 ratio, the parameter that exists in a majority of Western European countries. However all of this requires many years.

We reached out to Rosstat for commentary regarding variation in significant factors of Russia’s economic development. We are still awaiting a reply.


Connor Odekirk served as a Fulbright English Teaching Assistant in Perm, Russia from 2015-2016. He graduated from Haverford College in 2015 with degrees in English and Russian Area Studies.

 

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