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Putting Russia’s modernization in theoretical perspective
By Pr. Dr. Peter W. Schulze, Professor h.c. of Political Sciences, International Relations and Russian Studies at Georg August University of Goettingen
Introduction All economically successful nations have, at one moment of their development, pursued strong industrial and technology policies aimed at gaining and securing a competitive advantage in the global economy. The objective of such policies is of course to maintain or even improve a current standard of living but also, through the support to a country’s industrial and R&D sectors, to foster the emergence of innovative commercial products that will secure the country’s competitive advantage. This process, which often occurs over a long period of time and corresponds with an effort to adapt to new competitive and technological conditions is what is often referred to with the word “modernization”. The concept of modernization therefore doesn’t only apply to industrial, structural and social adaptation processes in developed nations trying to “renew” their economies, but can also be used in relation to the efforts of developing countries to catch up with their competitors in the developed nations. At the heart of all modernization efforts lies the need to renew the fundamental technological and industrial structures of a country. As a result, modernization strategies don’t differ dramatically from each other, even though variations are possible, and they can be applied in most countries around the world. This is also true for Russia, where modernization initiatives are already being implemented in a number of economic sectors. The following modernization efforts appear particularly important for Russia:
Acquiring foreign technological know-how The acquisition of technological know-how and the recruitment of highly-skilled employees can be achieved with the purchase of foreign technology companies or through foreign direct investments in the country’s R&D sector – which often benefits from strong state-supported measures. Tax incentives for direct investments and joint ventures with international partners can play an important role here, although foreign investors tend to be very cautious with regard to potential technology transfers. In Russia, the country’s 24 special economic zones have played a key role in attracting foreign investors, promoting the diversification of the economy and enhancing the country’s innovation potential. The Russian state has invested $1.5 billion in special economic zones since their creation in 2006, and private investors have contributed another $8.3 billion. The special economic zones cover crucial sectors for Russia’s economic modernization such as industrial tools, ship building and logistics. Private investors there benefit from tax rebates, public subsidies and less bureaucratic procedures.
Promoting import substitution Despite the gradual disappearance of blatant protectionism, public authorities in most countries continue to use tools allowing them to purse, albeit indirectly, a modern form of import substitution policy. These include, for instance, agreements with foreign companies according to which imported high-end products consist - at least to a certain extent - of parts manufactured locally (so-called “local content clauses”). Such indirect protectionist measures are useful for supporting the development of innovative production capacities.
A particularly appropriate example of such a strategy in Russia is of course the car industry, in which the so-called “decree 166” creates incentives for foreign car makers to expand their production capacities in Russia. On the basis of “decree 166 agreements”, which will be gradually phased out over the next seven years as a consequence of Russia’s membership in the WTO, foreign car manufacturers are granted customs and tax rebates on the condition that they commit to assembling at least 300,000 new vehicles per year in Russia and that the proportion of vehicle parts manufactured locally rises to 60 percent within five years. In light of the rapid development of Russia’s car market, numerous leading car manufacturers such as VW and Daimler have entered into such agreements with Russian producers and the Russian authorities. This allows the Russian economy as a whole to benefit from the huge investments being made in Russia’s automotive sector, and in particular to actively foster the modernization of the car parts supplier sector as a whole. However, the potential negative impact of such a policy on a country’s trade relations with its economic partners should not be ignored, evident in Russia’s protection of its local car industry proving to be a significant obstacle to its WTO accession. This is why the Russian government consistently insisted throughout WTO negotiations on the provisional nature of the measure – which according to the terms of Russia’s recently sealed WTO membership will have to be abolished by 2019.
Supporting local research and innovation Another crucial pre-condition for a successful modernization policy is the support of local research and innovation activities, with a focus on the development of tangible commercial innovations. This implies providing support to local research institutions and universities in order to train a big enough pool of innovative scientists and entrepreneurs to guarantee the sustainability of a country’s modernization efforts. Another very important task in this regard is the ongoing integration of a country’s scientific institutions into global scientific networks and opening them to the world’s leading scientific actors. The Russian government has taken a number of steps aimed not only at improving Russian science and research, but also at promoting the local development of innovative commercial products. The creation of the Skolkovo innovation center was a flagship initiative in this respect, where Russian start-ups benefit from a particularly favorable administrative and regulatory framework as well as from the experience of leading global companies. Russian authorities have also taken several initiatives to open Russian science to international research through the “mega grants” allocated by President Medvedev to a number of foreign and expatriate scientists in May 2011. These mega grants finance the conduct of international research projects in Russia with a view to benefiting to the development of Russian research and science as a whole. Another example is the very intense cooperation between Russian research institutions and the German Environment Ministry in the area of biomass research. This cooperation has led to the establishment of biotech research clusters in Nizhny – Novgorod, Kaluga and Kazan.
Modernization is an all-encompassing social process The modernization processes cannot take place exclusively in the field of R&D or in the field of manufacturing – but must combine both aspects. To be successful, modernization also requires the state to put a number of appropriate incentives and conditions in place. In Russia, it is important to note that the ongoing economic transformation process also generates a process of social diversification – which is why it will be unavoidable for Russia to make sure that modernization doesn’t only concern its leading industrial players, but rather encompasses all regions and sectors of the economy. The re-structuring of the Russian economy must be based on the emergence of new innovative SMEs, which will serve as technology suppliers to the country’s large industries and will make their voices heard by its administrative and political leadership. Russia’s modernization will only be successful if society and economy as a whole are fully integrated into the global economy. The combination of Russia’s productive capacities and resources with those of other developed economies is therefore one of the basic foundations of modernization. Such a modernization path, if it manages to involve the whole of society, will inevitably lead to political changes too.